Roger Schlesinger

I have heard it a million times, if I have heard it once, that when you refinance you get to skip at least one month of payments or more. The reason people believe that is they don't know or can't understand that mortgage interest is paid in arrears and that rent is paid up front. So when they think they are skipping a month in payments they simply aren't.

If your loan closes on the 10th of the month you are charged with prepaid interest until the end of the month, 18, 20 or 21 days of interest (leap year would be 19 days for all who wish to keep the record straight). You will not make a payment on the first of the month as you have prepaid the interest up until the first of the month and that interest pays the preceding month's bill. When the next month comes the preceding months interest is then due. Which gets me into my next point. If your adjustable is changing at the first on the next month you will be paying the increased interest (if the adjustable increases in rate) all during the month preceding the increase. Therefore if you don't want to pay this higher rate then you need to refinance before the month preceding the increase. Why does this happen: because interest is paid after it is earned not before.

When refinancing a primary residence you will have a three day right of recession. It cannot be waived and you must wait until the three days are up before the loan is funded. On a second home it is rarely applied and on a rental or non owner occupied it is never applied.

Lenders are wary of people not having enough time to review their decision on their own home loan and will allow you, in most cases, to rescind after the three days as long as the loan hasn't funded. Again, this only applies on primary residences and once in a great while on second homes.

On an option arm the three other options, not the teaser or minimum rate, are generally too high so one should always make the decision on this particular loan on the teaser or minimum rate and what it will do to your financial situation. The teaser or minimum rate is generally a negatively amortizing rate as it usually doesn't pay the interest due on the loan each month. The difference between the interest that is scheduled and the teaser or minimum payment is added to the balance of the loan and interest is charged on this amount as well.

Those with the financial capability and self control can sometimes put this type of loan to work for themselves without building a negative balance, but those who fit this category are few and far between.

Roger Schlesinger

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.