“Cash to Close” refers to the amount of cash you will need to put into escrow to ultimately close your refinance. This is an extremely important concept to know because there is often so much confusion surrounding it.
A “no cost refinance” does NOT mean you won’t need to bring in cash to close. A no cost refinance means that lenders will cover your one-time fees (nonrecurring closing costs), but it does not mean that they will cover your “prepaid items” (recurring closing costs) such as interest, property taxes and/or hazard insurance. These fees can add up to several or even tens of thousands of dollars depending on when you close and depending on whether or not you are setting up a new impound account. (Quick note: the term “recurring” is used because the fees recur over the life of the loan, and are charged regardless of whether a refinance happens or not).
For example, if you close your refinance with any property tax bills are outstanding, you will have to pay them in escrow because all lenders require that property taxes are paid to current when you close. This also applies to any outstanding supplemental tax bills. These supplemental bills commonly ‘pop up’ 6-12 months after purchasing a home. This supplemental bill would be an item that is coming due regardless of this refinance. Additional information surrounding supplemental property taxes can be found here.
In addition, if you close at the beginning of the month and have not yet made a payment for your current loan, you will have to prepay interest through the end of the month for your new loan and you will also have to pay all of the interest for your old loan that accrued over the previous month. You will pay interest on your mortgage regardless of whether you refinance, but because you are refinancing the bill is due at close.
Example Refinance Scenario: Jill Smith wants to refinance her $400,000 loan with a 5% interest rate. She wants a “no cost” refinance with an interest rate of 3% that will close on February 15th when property taxes are also due. Her property taxes are $10,000 per year, or $5,000 every six months. She does not want to increase her principal balance either.
Jill’s “Cash to Close” might look like this:
|Money Required to Pay Off Old Loan:
|Principal Balance of Old/Current Loan:
|Interest Accrued on Old/Current Loan:*
|Prepaid Interest on New Loan:**
|Pay-off Demand Fee:
|Less Principal Balance of New Loan:
|CASH TO CLOSE
* Interest on old loan is the amount that accrued from Jan 1st – Feb 15th.
** Prepaid interest on new loan is from Feb 15th – Feb. 28th.
*** Many lenders require that Hazard Insurance be renewed when a refinance closes.
NOTE: This loan is still a “no cost” loan even though Jill is bringing in $9,100 because she is not paying any nonrecurring costs and is only prepaying items she would have to pay anyway – whether she refinanced or not.
In addition, Jill will not have a March mortgage payment. This is because she is paying her February interest through the end of the month when she closes her refi, making a March payment unnecessary. For more information about this, please see Do I Skip a Payment?