Refinance FAQ’s
Attorney Richard D. Vetstein. writes today about the nuts and bolts of closing on a refinance.
With interest rates at all time lows, we’ve been doing a ton of refinance closings. Here are some questions which often come up.1. Why does the payoff of my existing mortgage seem higher than I thought?
In many cases, borrowers will focus only on the “principal balance” figure in their mortgage statement. However, this figure does not provide the complete figure necessary to pay off the loan. You must also pay any unpaid interest calculated up to the time that the lender actually receives the payoff check which will be several days after your closing. Mortgage interest is not like traditional rent in which the monthly payment is for the upcoming month. Mortgage interest is paid in arrears, or backwards. Thus, your monthly mortgage payment is allocated partially to principal, but also pays the daily interest accumulated during the last month.
Therefore, if your refinance loan is funding on August 15, we must pay off your existing principal balance plus the interest that accumulated from August 1 to August 15 (plus additional days necessary to get the payoff check to the bank). That unpaid daily interest makes your payoff higher than just the principal balance. Frequently included in your payoff is also a $75.00 registry discharge recording fee and a fee to issue a payoff statement (usually between $10.00 to $60.00).
2. What is an escrow account and why is my lender collecting so much money for it? An escrow account is established with a lender to pay for recurring expenses related to your property, such as real estate taxes and homeowner’s insurance. It helps you to anticipate and manage payment of these expenses by including these expenses as a portion of your monthly mortgage payment. At the time you establish an escrow account, your annual real estate taxes and homeowner’s insurance are estimated, based on your most recent bills and premiums. An incremental amount of these expenses is added to your monthly mortgage payment, in order to cover these expenses when they are due. Each year, your escrow account is reviewed to determine if the amount being escrowed each month is sufficient to pay for any change in your real estate taxes or homeowner’s insurance premiums. At closing, we will collect sufficient funds to start your escrow account, typically 2-3 months worth of real estate taxes and up to a 12 months of homeowner’s insurance.3. When will my refinance proceeds be available?
Federal law requires that borrowers of a refinance loan must be given three days to rescind the transaction. This is commonly referred to as the “three-day right of rescission.” You cannot waive this right to cancel. Therefore, your lender cannot fund your loan until such rescission period has expired. When calculating the rescission period, the day that the closing occurs, Sundays and Holidays are not rescission days and are not counted. Thus, if your closing occurs on a Thursday, it will fund on the following Tuesday (Friday, Saturday and Monday being the three rescission days – Thursday of closing and Sunday not counted).
