How do you calculate the "New Loan Amount" on a Mortgage Refinance?
(Why is my "New Loan Amount" so much higher than my current balance?)
These questions are common when refinancing, so let's take a deep dive at the details.
When refinancing, there are 4 "parts" to the NEW Mortgage Loan Amount:
Payoff of OLD Mortgage - which will always have accrued interest added to the principal balance.
- In other words, let's say for example that we paid off OLD Mortgage on 9/25/2020
- It would be safe to assume that you would've already paid your 9/1/2020 payment to your OLD (Existing) Mortgage Lender by then
- When making your 9/1/2020 payment, you simply paid the interest due for the PREVIOUS month (August)
- Therefore, your payoff on 9/25/2020 would add an additional 25 days of interest to the payoff (along with a few release fees, such as the Deed of Reconveyance which removes OLD Lender from lien position on your home)
Non-Recurring Closing Costs (NRCC's) - these are the "one time costs" associated with creating the new mortgage. These NRCC's can be broken down into 2 subcategories:
Lender "Origination Fees" - This amount will vary depending on which interest rate is selected
- Higher Interest Rates = Lower Origination Fees (these fees can even be NEGATIVE fees, aka CREDITS in many cases)
- Lower Interest Rates = Higher Origination Fees (if you opt to pay Discount Points to buy your interest rate down below market pricing)
Third Party Fees - These fees relate to other Vendors (with a different logo on their business card than your Lender). Examples of Third Party Vendors include (but are not necessarily limited to) Appraisal, Escrow Company, Title Insurance, County Recorder, Notary, Homeowners Association (HOA), etc.
- NOTE: These fees may not be "marked up" by the Lender (this practice is illegal)
- Lender "Origination Fees" - This amount will vary depending on which interest rate is selected
Recurring Costs (RC's) - These are ongoing costs of home ownership when owning a home. THESE ARE NOT FEES TO ACQUIRE THE NEW MORTGAGE LOAN (and thus, should not be co-mingled into the NRCC's category when shopping for a loan). Examples of RC's include (but are not necessarily limited to):
- Homeowners (aka Hazard) Insurance - depending on when your existing policy is set to renew, you may need to extend out the coverage for a period of time.
Impound (aka Escrow) Account (IF APPLICABLE) - Initial deposit of a prorated amount of Property Taxes
- NOTE: When you close your loan matters! Per the chart below, find the month your NEW MORTGAGE is completed (funded) in the YELLOW column, then find the corresponding amount of Property Taxes collected in the Pink & Blue Columns
- For more details on why the above calendar exists, please CLICK HERE to learn about the California Property Tax Assessor's payment due calendar.
- It bears noting that once OLD MORTGAGE is paid in full, they will send you a check for the amount of Impound Money they were holding on your behalf (as they no longer have a bona fide reason to hold your money once they have been paid in full).
- Summary: NEW MORTGAGE builds the Impound Account from scratch, OLD MORTGAGE reimburses you withing 2-3 weeks after they are paid off)
Per Diem (Per Day) Interest is also collected (regardless of whether you have an Impound/Escrow Account)
- Using the example in Part 1 above, if the NEW LOAN funds on 9/25/2020, the first payment due on NEW LOAN will be on 11/1/2020
- When making the 11/1/2020 payment, you are covering the interest for the previous month (October) in a process called "paying interest in arrears" (or "from behind").
- Therefore, if your 11/1/2020 "first payment due" covered all of the interest for October, yet the NEW MORTGAGE Lender "let go of the money" (i.e. "funded" your new loan) on 9/25/2020, there are still 6 days of interest calculated between 9/25/2020 and 9/30/2020) collected here.
NOTE: If your "New Loan" is going to fund within 60 days of Property Taxes being due (1st Installment: Due November 1st, 2nd Installment: Due February 1st), the "New Lender" will require Property Taxes be paid. There are 4 ways to accomplish this task:
- Borrower pays in advance, displays evidence of payment (NOTE: if this is your plan, you are advised to pay by check early on as opposed to paying by credit card at the last minute. Credit Card payment fees can range between 2.50% - 3.50%, which can be a very pricey transaction.
- Wait for "Old Lender" to pay the Property Taxes. The challenge with this option is that "Old Lender" will likely wait until the last 48 hours of the grace period before paying (in an attempt to maximize the interest they can earn on your money). Deadlines are as follows: 1st Installment: December 10th, 2nd Installment: April 10th.
- Build the full Installment Payment into "New Loan" in this section of the loan amount (Section 3)
- Borrower "brings in" the tax installment payment as "Cash-In" (aka "Funds/Cash To Close") at the final stage of the refinance process.
- We typically shoot for an amount between $1.00 and $2000.00 here
- The reason we shoot for at least $1.00 is because most people prefer NOT to bring in any money when refinancing (you are of course welcome to bring in as much money as you want)
- The reason we "cap" at $2000.00 is because once we exceed this amount, the loan is re-classified from a RATE & TERM (R/T) Refinance to a CASH-OUT (C/O) Refinance (and the rate quote worsens)
- NOTE: If you are pursuing a CASH-OUT Refinance, the amount of Cash-Out provided in this section may vary considerably.
In summary, there are several parts to take into account when calculating the NEW LOAN AMOUNT. Typically, when Initial Loan Disclosure Forms are created early in the process, the new estimated Loan Amount will be inaccurate. As the refinance process moves forward, numbers are updated accordingly, and new Federal Loan Disclosures are provided to the Borrower(s) to insure a clear audit trail throughout the process.
The friendly takeaway here is that Lender's will typically need to revise the initial estimated numbers (so take the NEW LOAN AMOUNT referenced on the Initial Loan Disclosure Forms with a grain of salt, as updates & modifications are likely to follow).