When you get a mortgage to buy a home you are only charged interest from the date your loan closes until the end of the month in which your loan closes. When you refinance your mortgage, however, you are charged interest for the full month in which your refinance closes. This interest expense is due at closing and can be a significant cost, depending on your original and new loan amount and mortgage terms.
The reason why you are charged a full month of interest at closing when you refinance is because your existing lender charges interest from the first of the month until the date of closing and your new lender charges interest from the date of closing until the end of the month. The partial month interest charged by your prior lender plus the partial month interest charged by your new lender equals a full month of interest charged to you when your refinancing closes.
For example, if your refinance closes on April 11th, you owe your current lender interest for April 1st through April 10th (ten days) and you owe your new lender interest for April 11th through April 30th (twenty days).
You are required to pay this full month of interest cost at closing (April 11th in this example) and some of it goes to your old lender (paying interest due in arrears) while the remaining portion goes to your new lender (prepaid interest for the partial month). Even if you do not change lenders, the concept is the same because your loan terms change and you have two different mortgages.
The table below shows mortgage refinance rates and fees for leading lenders in your area. We always recommend that you shop multiple lenders to find the best refinance terms.
You may be asking why you are required to pay your current lender partial interest if you already made your mortgage payment on the first of the month. Does this mean you are paying interest twice for the same month?
The answer is no because mortgage interest is paid in arrears so the payment you made on the first of the month was actually for the interest due the prior month. Returning to our example above, if you made your monthly mortgage payment on April 1st, you actually paid the interest due for March.
It is important to budget for a full month of interest cost when your refinance closes and make sure you have sufficient funds to pay this extra cost. On a positive note, your first full payment on your new mortgage is not due until the the second month after your refinance closes. So if your refinance closes on April 11th, your first payment is not due until June 1st, which gives you a month to catch up financially.