The Trick to Skip Two Mortgage Payments Per Year

I skip two mortgage payments per year.  It’s not a trick and anyone with a mortgage can do the same.  All it takes is a little time and paperwork gathering twice a year.  Honestly, the paperwork seemed like a lot in the first year.  The great news is that by year two, I knew all the paperwork that would be needed and had a great system for keeping it all in one place.

Refinance = Skipped Mortgage Payment

A mortgage payment is always made in arrears.  A mortgage payment, for example, that is due on July 1st covers the principal and interest payment for June.  At the closing of a mortgage refinance, the interest for the current month is paid at closing.

At the closing of a refinance, a full month of interest is always covered.  The interest is split up between the interest owed on the current mortgage and the interest on the new mortgage.  If a refinance is closed on the 15th day of the month, there are 15 days of interest paid on the payoff of the current.  There are also 15 days of interest paid on the new loan.

Why Do I Skip a Payment?

When a refinance closed in June and interest is paid on the new loan at closing the next interest payment is not due until September.  As discussed above, the September payment covers principal and interest for August.  Since the June interest was covered at the refinance closing, there is no payment due on July 1st.  The July 1st payment normally covers the principal and interest for June (but these were already paid at closing).

A Refinance Has Closing Cost – Do I Skip a Payment

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It is tA refinance indeed has costs.  Closing costs typically run between .5% – 3% of loan amount.  The actual cost will be determined by the loan amount, loan-to-value, cred credit property type, and the state where the subject property is located.

Although there are closing costs associated with the refinance refinancing does not need to be paid directly by the consumer.  A refinance can be done with no closing costs.  Your bank or mortgage broker can provide you with a lender credit that covers all the refinance costs

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Use cost Refinance and Skipped Payment!

A no-cost refinance is the best option for refinancing to skip two payments per year.  The lender closing cost credit can cover all closing costs including lender fees and title fees etc.  If an appraisal is required, the appraisal fee would need to be paid before closing.  There are multiple ways to use the refinance to cover the cost of the appappraisalWe will discuss these options below.

Does a NoNo-Costefinance Have a Higher Interest Rate than a Standard Cost Refinance?

Yes, closing costs refinance does come with a higher interest rate than a standard cost refinance.  There is no French!  The title company and underwriter still need to be paid.  With the no cloclosingst option, the consumer does not pay costs out-of-pocket at closing.  They are also not rolled into the loan amount.

Mortgage money does not come directly from the bank or lender.  The bank does not keep money in thitheirult and takes it out to make a mortgage loan.  Most mortgages are bundled through quasi-governmental agencies such as Fannie Mae, and Frand Eddie Mac of FHA.  These agencies will bundle together hundreds of millions of dollars in mortgage trtransactionsnd and sell them to investors on the secondary market.  These bundles that get sold are known as mortgage-backed securities.

Investors, on the open market, purchase these mortgage-backed securities.  The investors earn the interest paid on the mortgages.  In most cases, the interest on a mortgage payment does not get paid to the bank or lender.  The interest goes to the investors who purchased the mortgage-backed securities.

Lenders Don’t Get the Interest?  How Do They Get Paid?

Lenders and banks do make money on the mortgage origination side.  Often, the margins on mortgage originations can be very low.  Many lenders also have mortgage servicing divisions.  A mortgage servicer collects your monthly mortgage payment.  The servicer distributes the interest to the investor and pays property taxes and homeowners insurance if applicable.

Ok.  So How Do Mortgage Servicers Get Paid?

As we discussed, the investor gets paid the interest collected on the mortgage.  The investors are not interested in collecting mortgage payments or paying taxes and homeowners insurance.  They, in turn, pay a fee to the mortgage servicer for handling payment collection, escrow payments, and customer service.

I Still Don’t Understand Why I Don’t Have to Pay Closing Costs

An investor collects more interest at a higher interest rate.  At the time of origination, the investor will pay the lender more at higher rates.  The additional payout for higher interest rates is known as overage.  Due to the many mortgage regulations that were put into place post the 2008 financial collapse the overage does not go to the lender.  The lender gets paid a set amount based on the loan amount per originated loan.  The overage for a higher interest rate goes back to the consumer in the form of a lender closing cost credit.

The closing cost credit is applied to cover all third-party closing fees including title and recording fees.  By using the closing cost credit, the client does not have to pay costs out-of-pocket at closing.  There is also no closing cost rolled into the loan amount.

The benefit of using the no closing cost refinance is that there is no increase in loan balance with each refinance.  When refinancing twice per year, it is important to not continually increase the mortgage balance.

What Should I Do With My Skipped Payments?

The great thing about this twice-a-year refinance is that the two skipped payments cover your total monthly mortgage payment (principal, interest, taxes, and insurance) not just principal and interest.  If your total monthly mortgage payment is $3,000 – you can put $6,000 in your pocket each year.

If you do not have too much other consumer debt and you have a nice savings nest egg built up, the suggestion I make is to put those funds ($6,000 in the example above) toward your principal repayment.  Paying those extra funds toward your mortgage principal balance each year will help you pay down your mortgage balance much more quickly.  When you pay your mortgage off early, it greatly reduces your total interest paid over the life of your loan.

One of the best ways to secure your retirement goals is to have your mortgage paid off before retiring.  The twice-a-year refinance plan will help you get there much more quickly.

What If I Have A Lot of Other Consumer Debt

Many Americans are currently drowning in credit card debt, personal loans, and other consumer debt.  Although a few years ago some of these accounts had relatively low interest rates – those days are gone.  When inflation picks up, rates and payments on credit cards explode.  Credit card rates are expected to continue to climb in the coming years.

If there is currently equity in your home, the first refinance should be a cash-out to clear out as much debt as possible.  Once that refinance is completed, you would continue twice a year refinances.  At that time, the skipped payments can be used to clear out any remaining consumer debt not covered by the refinance.  Once the debt is paid off, then the funds plus all other monthlly savings realized from the refinance savings can go toward principal payments.

Should I Be Concerned About Interest Rates if I Refinacne Twice Per Year?

The great thing about the twice a year refinance program is that it takes the worry about interest rates off the table.  Over time mortgage rates will go up and will go down.  In a sense, you will be dollar cost averaging your interest rate and mortgage payment.  Accelerating your principal pay down, will help reduce your interest and overall payment continually over the life of the loan.

Each time you refinance, you will have all options available at your disposal.  These options include 30, 20 and 15 year fixed rate mortgages.  You also have options such as 3 year, 5 year, and 7 year adjustable rate mortgages.  These options will help keep your overall monthly payment down and you will refinance out of the mortgage prior to any adjustment.