Since there really are only two types of mortgages today, conventional and government, lenders can have a hard time distinguishing themselves from one another. Unlike the housing debacle in the mid-2000s where there was a plentiful mix of mortgage loans with names such as "Pick-a-Pay" or "Option ARM." No, today it's (thankfully) rather boring. That means sometimes lenders can get creative with their marketing campaigns. Have you heard of the one that lets you skip two payments?
When refinancing a mortgage loan, you're replacing one mortgage with another. Brand new lender; brand new loan. And when you visit your closing you'll see your old lender listed on the settlement statement with your current balance that's about to be paid off and your new lender replacing your old one. You'll also see a line item called "prepaid interest."
Prepaid interest is the amount of daily, or per diem, interest from the date of the closing to the first of the following month. If you close on the 30th of the month, the new lender will collect interest from the 30th to the first of the month, typically one or two days' worth.
In addition, as borrowers make their mortgage payment on the first of every month, their payment goes partially to the outstanding balance, or the principal, and part to the interest that accrued over the previous month. Mortgage interest is always paid in arrears on an outstanding loan; you're always paying last month's interest accrual.
Mortgage refinance ads can incorrectly claim that not only can they lower your rate but you can skip two payments. That's not true. Your payments are in fact made, just at the closing table when you refinance. You'll have one small amount for prepaid interest collected and all interest that accrued with your old loan is added to the outstanding loan balance. You pay it, you just don't notice it.
When you hear such ads, and if you pay attention you will, remember that any lender will do the same. They just don't try to mislead you about the process.
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