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3 Steps to Refinance without Increasing Your Loan Balance
One of the most common questions I get is:
How can I refinance my loan without increasing my principal balance?
There are three things that go into establishing a loan amount:
- The principal balance on the existing loan – Which will also include any payoff fees they charge as well as interest due on the loan.
- The amount of closing costs for the option you choose.
- The pre-paid set up, which includes establishing an escrow account for tax and insurance payments as well as interest from the day you close through the end of the month. Mortgage interest is always paid in arrears.
Step 1 – Choose a No-Cost Loan
The first step is to choose an interest rate that has $0 fees which will equate to zero closing costs. This is what we term a “no-cost loan”. This will eliminate option #2 above.
Step 2 – Escrows
The second step is to avoid having to bring cash to close. I suggest adding the new escrow account set up to the new mortgage. Then, when you receive your current escrow refund, you can apply this as a principal reduction on your first payment of your new loan. If you do not currently have an escrow shortage, the amount needed to establish an escrow account should be in line with the amount you have in your current escrow account. This takes away the escrow part stated in c above.
Step 3 – Interest
And lastly, the interest due on the current loan (a), as well as the interest due on the new loan (b), will account for just over one month of interest. Since this is interest that you would pay regardless, it isn’t a fee for doing a new loan. It is just changing where the current payment due on your existing loan is being sent. As a result, you will end up missing one mortgage payment. The solution to not have this one month of interest impact your ending mortgage balance is to make the additional payment that you will be missing as a principal reduction to the first mortgage payment due on your new loan.
In short, by choosing a no-cost loan and applying the escrow refund as well as the missed payment to the first payment on the new loan, you will owe no more on your new loan that you owe on your current loan. In the end, it will not have impacted your expected cash flow, so you will be in the exact position as you are in currently.
