The offer sounds great: Your lender promises that when you refinance your mortgage loan you'll be able to skip a month's mortgage payment. It's time to start fantasizing about what you'll do with all that money you won't be sending to your lender.
But don't get carried away. There really is no such thing as skipping a mortgage payment -- without penalty -- even when you refinance. You'll be paying that "skipped" mortgage payment, including interest, at some point.
No free months
The truth is, once you take on a mortgage loan, there are no free months. You need to make your mortgage payments on time every month until you pay back what you borrowed.
This gets complicated, though, when you refinance your existing mortgage loan into one with a lower interest rate or shorter term.
If a lender tells you that you'll be skipping a payment, or even skipping two payments, when it's time to refinance, don't be fooled: You'll still be paying everything you owe, plus interest. That "skipped" payment? You'll just be making it at a different time.
How it works
Say you close your refinance on March 23 and your first mortgage payment to your new lender will not be due until May 1.
So if you aren't sending a check to your old lender in April -- which you won't, because your new lender will have already paid off your old mortgage loan -- it does look like you're skipping a month.
But here's what really happens: First, you will have to pay the interest on your new loan for the remaining days of March. If you close on March 23, this means that on your closing day you'll have to pay the interest for the nine remaining days in the month. Your lender will include this payment on the prorated interest section of your HUD-1 Settlement Statement.
Your first payment to your new lender, on May 1, will include all the interest charges from April 1 through the start of the new month. That's not unusual: Your lender will always include the interest from the previous month with every mortgage payment you make.
As you can see, then, you are not getting any real break from making interest payments when you "skip" a payment after a refinance.
But how does "skipping" a payment work with the principal balance portion of your mortgage payment?
It's simple: When you "skip" a payment, it will just take one payment longer to pay off your new loan, if you carry it to full term.
If you are refinancing to a 30-year loan, you'll still have to make a total of 360 payments -- 12 payments a year for 30 years -- to pay off that loan in full, whether you skip a payment after your refinance or not. If you refinance to a 15-year loan, you'll still have to pay your lender 180 times if you spend the full 15 years to pay off your loan.
Keeping good habits
Because of this, financial speaker and author Rachel Cruze says that it might actually be in the best interest of consumers to skip the "skipped" payment after a refinance.
If possible, instead of waiting to make that first payment to your new lender on May 1, you might ask if you can make your first payment on April 1, eliminating that one month in which you're not making any payment.
Why do this? Because it's good to stay in the habit of making your mortgage payments on time every month, Cruze said.
"When you try to get fancy and overcomplicate things, it can sometimes backfire on you," Cruze said. "If you are in the habit of making payments every month, stick with that consistency. Besides, if you don't skip a payment, you can pay down that loan as quickly as possible."
What about skipping when you haven't refinanced?
Skipping a payment after a refinance - or, more accurately, having the illusion of skipping one -- is a common event. But consumers facing financial struggles should never intentionally skip a payment once they're actually in the process of paying back their refinanced loan.
"The only time it makes sense to skip a payment is if you are not going to be able to put food on the table," said Kelley Long, resident financial planner for El Segundo, Calif.-based Financial Finesse and a spokesperson with the National CPA Financial Literacy Commission. "And even then, you need to think long and hard. Skipping a mortgage payment is a serious issue."
If you are struggling to make your payment on time even after you've refinanced? Long says to call your lender. Your lender might be willing to let you skip a payment or two to recover. But remember, just as in refinancing, you won't actually skip any payments. You'll still have to make those payments at some time, plus interest.
Of course, sometimes a break is nice
This all doesn't mean that having a month break from sending in a mortgage payment after a refinance is a bad thing. It is nice to have a break from writing that big check. And closing a refinance can be expensive. It's can help to have a payment break to allow yourself to recover from coming up with closing costs.
Skipping a month of mortgage payments can also make it easier to tackle deferred maintenance in your home. Instead of sending $1,500 to your mortgage lender, you can spend that money on a new furnace or water heater. That way, even though you're skipping a payment, you're still making an investment in your home.
But if you receive a solicitation in the mail from a lender promising you a skipped mortgage payment or two, don't believe the hype. You'll still pay the same amount of money.