Introduction

“Should I make last mortgage payment before closing refinance?” If you are looking for similar answer, you are on the right page. Refinancing your mortgage can be a strategic financial move to reduce your monthly payments, obtain a lower interest rate, or tap into your home’s equity. However, one question that often arises during the refinancing process is whether or not you should make the last mortgage payment before closing the refinance. In this article, we will explore this important decision and provide guidance on what homeowners should consider when faced with this choice. Explore the idea of last mortgage payment before refinance.  Let’s start with, what is refinancing mortgage?

Understanding Mortgage Refinancing

Before delving into the question of whether to make the last mortgage payment before refinancing, it’s essential to have a clear understanding of what mortgage refinancing entails. Mortgage refinancing involves replacing your existing home loan with a new one, typically with more favorable terms. The main goals of refinancing are to lower your monthly mortgage payments, secure a lower interest rate, change the loan term, or access the equity in your home.

The Decision Dilemma

When homeowners decide to refinance their mortgages, they often find themselves in a dilemma regarding the last mortgage payment. On one hand, making the last payment may seem like the responsible thing to do, ensuring that you are up-to-date on your financial obligations. On the other hand, some homeowners wonder if it’s more advantageous to hold off on that last payment until after the refinance has closed. Let’s break down the factors you should consider to make an informed decision.

1. Loan Terms and Interest Accrual

The first factor to consider is the loan terms and how interest accrues on your current mortgage. Most mortgages have a grace period for payments, typically around 15 days, during which you can make your payment without incurring late fees. Beyond this grace period, your payment is considered late, and late fees may apply.

Interest on mortgages is typically paid in arrears, meaning that when you make your monthly mortgage payment, you are covering the interest that has accrued over the previous month. If your refinance closing date falls within the grace period, you may wonder if you should make that last payment.

2. Closing Date and Interest Proration

The closing date of your refinance is crucial in determining whether or not to make the last mortgage payment. When you close a refinance, the interest on your old mortgage is prorated, which means it’s divided based on the number of days you’ve had the old loan in that month.

For example, if your refinance closes on the 20th of the month, you’ll only owe interest for the first 20 days of that month. This prorated interest amount is typically paid at closing. Therefore, making the last mortgage payment just before closing might be unnecessary, as the proration will cover those days.

3. Cash Flow Considerations

Cash flow is a significant factor to weigh when deciding whether to make the last mortgage payment before refinancing. If making that payment will strain your finances and leave you with little cash on hand, it might be wiser to hold off until after the refinance is complete. Refinancing can come with closing costs, which can be paid upfront or rolled into the new loan. It’s important to have enough liquidity to cover these expenses.

4. Lender Requirements

Lenders may have specific requirements and guidelines regarding the last mortgage payment before refinancing. Some lenders may require borrowers to make the last payment, while others may allow borrowers to skip it and include the outstanding balance in the new loan. It’s essential to communicate with your lender and understand their policies to avoid any complications during the refinancing process.

5. Credit Score Implications

Missing a mortgage payment can have a negative impact on your credit score. If your refinance is delayed for any reason, you could end up with a late payment on your credit report. This is another factor to consider when deciding whether to make the last mortgage payment. Protecting your credit score is important for your overall financial well-being.

6. Discuss with Your Mortgage Professional

One of the best steps you can take when facing the decision of whether to make the last mortgage payment before refinancing is to consult with your mortgage professional. They can provide personalized advice based on your specific situation and the terms of your refinance. They can also help you understand the potential benefits and drawbacks of making the last payment.

7. Equity and Loan-to-Value Ratio

Your home’s equity and loan-to-value (LTV) ratio play a significant role in refinancing decisions. Equity is the difference between your home’s current market value and the remaining balance on your mortgage. If you have a substantial amount of equity, it can be advantageous for your refinance. A lower LTV ratio can result in better loan terms, including a lower interest rate and potentially waiving private mortgage insurance (PMI).

If your goal in refinancing is to access your home’s equity, making the last mortgage payment may be counterproductive. Instead, you may want to delay the payment until after the refinance closes to maximize the amount of cash you can access.

8. Tax Implications

Mortgage interest payments are often tax-deductible for homeowners, which can lead to potential tax benefits. However, the timing of your last mortgage payment in relation to your refinance closing can impact these deductions. It’s essential to consult with a tax professional to understand how making the last payment or delaying it might affect your tax situation and deductions.

9. Loan Application and Underwriting

The mortgage refinancing process involves a loan application and underwriting, during which your financial documents are reviewed by the lender. If you’ve already made the last mortgage payment, it may not significantly impact the underwriting process. However, if you choose to delay the payment, the lender may require you to provide an explanation and additional documentation regarding the outstanding balance.

10. Interest Savings vs. Convenience

One of the primary motivations for making the last mortgage payment before refinancing is to minimize interest expenses. By paying off the remaining interest for the current month, you reduce the overall interest costs associated with your existing mortgage. However, it’s essential to weigh this interest savings against the convenience of holding onto that payment until after the refinance closes.

In some cases, the potential interest savings may be relatively small, while the convenience of having that extra cash available during the refinance process could be more valuable to you.

Conclusion

The decision of whether to make the last mortgage payment before closing a refinance is not a one-size-fits-all answer. It depends on various factors, including your loan terms, the closing date, your financial situation, and your lender’s policies. To make an informed decision, it’s crucial to consider all these factors and, if in doubt, consult with your mortgage professional.

Ultimately, the goal of refinancing is to improve your financial situation. Whether you choose to make the last mortgage payment or not, the key is to ensure that the refinance aligns with your financial goals and helps you achieve a more stable and comfortable homeownership experience.

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