Mortgage Refinance: Closing Process Explained

March 3, 2008 by TFB

My mortgage refinance has been approved by the lender. Now it's time to pick a date for signing the papers. Is any day of the week better or worse than others? Yes, if you want to avoid paying extra interest on a large sum of money.

The federal law (15 USC 1635) says if you refinance the loan on your primary residence from a different lender, you have 3 days to rescind. That means if you change your mind after you signed the documents, you can still get out of it within 3 days. It also means that the lender won't fund your loan until the 3-day rescission period is over. There is no right of rescission on a purchase loan, or if you are refinancing from the same lender, or if the loan is not for your primary residence. The 3-day clock starts on the day *after* the loan documents are signed and all the necessary disclosures and notices are given. Saturday counts as a day but Sunday and bank holidays don't count.

Here's the usual chain of events when you close a mortgage refinance as practiced in my area:

Day 1 : You sign the documents and receive all the disclosures and notices.

Days 2-4 : Rescission period. Remember Saturday counts but Sunday and bank holidays don't.

Day 5 : The escrow agent requests funding from your new lender. The new lender wires the money to the escrow account. You start paying interest on your new loan on this day. You are still paying interest on your old loan.

Day 6 : The escrow agent pays off your old loan by wire transfer if your old lender accepts payoffs by wire. If they don't, the escrow agent sends them a check by FedEx. The escrow agent also records the new mortgage with the county recorder's office. You are still paying interest on your old loan until it's paid off.

Day 7 : If the payoff is sent by FedEx, the old lender receives the payoff check. The old loan is paid off. You stop paying interest on your old loan.

You start paying interest on the new loan from the day the loan is funded. You stop paying interest on the old loan on the day it's paid off. There's going to be at least one day of overlap for which you are paying interest on both loans. You want to make sure you minimize that overlap to only one day or maximum two days.

Here's a little calendar for the loan refinancing events taking into consideration the 3-day rescission period but assuming there is no bank holiday involved. Each number represents a day on which the loan documents are signed. Just follow the number. For example, if you sign the docs on a Tuesday, the rescission period ends on Friday; the new loan will be funded on the following Monday; and the old loan will be paid off on the following Tuesday (by wire) or Wednesday (by check).

Mon Tue Wed Thu Fri Sat Sun
Docs signed 1 2 3 4 5
Rescission period ends 4 5 1 2 3
New loan funded 2 , 3 4 5 1
Payoff wire sent OR check FedEx'd 1 2 , 3 4 5
Old loan paid off (by wire) 1 2 , 3 4 5
Old loan paid off (by check) 1 2 , 3 4 5

The calendar shows that Monday is a bad day for closing because your new loan is funded on Friday, and you start paying interest on it but your old loan isn't paid off until the following Monday or Tuesday. You pay interest on both the old loan and the new loan over the weekend. If payoff is done by a FedEx'd check, signing the docs on Friday is also pushing it. If all goes well, the old loan is paid off on the next Friday. If there's a delay by one day, you will also pay interest on both loans over a weekend. Signing the docs on Tuesday or Wednesday is the best for closing a mortgage refinance because the new loan is funded on Monday and you have the entire week to work with. Thursday is also a good day.

If you have to sign the docs on a Monday, make sure to specifically ask the escrow agent not to request funding on Friday.

Next week, after I sign the loan documents, I will explain what those documents really mean.

[Update on March 4, 2008]: I asked the escrow agent and she said they would pay off my old loan using a wire transfer. That way it cuts down the interest overlap to only one day. She also said that not all lenders accept payoffs by wire. I revised the calendar accordingly.

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Comments

8 Comments on Mortgage Refinance: Closing Process Explained

  1. indexfundfan on March 3, 2008 | permalink
    2.  

    tfb,

    Questions for you :

    1. Is FedEx always involved to pay off the old loan? Or is it only for the escrow company you are using? Wouldn't the escrow agent wire the money to the old lender?

    2. Based on your chart, I couldn't figure out why Thursday is not a good day to close.

    Thanks.

  2. TFB on March 3, 2008 | permalink
    3.  

    I don't know the answer to the first question. All my refi's are done at the same escrow company and they always used FedEx. I'm interested in hearing what others' experience is.

    Thursday is also a good day, just not as good as Tuesday or Wednesday. If you sign the docs on Thursday, you have a 1-day cushion for any delay. Tuesday and Wednesday have a cushion for 2 days. In the order of preference, it is

    Tue/Wed > Thu > Fri >> Mon

  3. indexfundfan on March 3, 2008 | permalink
    4.  

    Thanks. I am asking all these questions because my refi will close on a Thursday. Also, this is the first time I am not doing a refi with the same lender.

    I think a wire was used for my last refi, but I could be wrong.

  4. TFB on March 4, 2008 | permalink
    5.  

    When I sign my documents, I will ask them about paying off the old loan by wire.

    I hope you got a good rate too!

  5. ManInTrouble on May 18, 2009 | permalink
    6.  

    I have just refinanced my loan. The paper was signed on 5/6/09 (Wednesday). According to the final closing statement, I start paying interest to the new lender on 5/11/09 (Monday). The closing date is 5/12/2009 (Tuesday). But when I contacted the old lender, I was told that they received the funding on 5/15/2009 (Friday) and therefore, they charged me interest for 14 days.

    I understand that it's typical to pay 1 or 2 days of overlap interest during refinance. But 4 days of overlap interest seems unusual (especially when the closing date falls on a Tuesday).

    Questions are:
    1. If the closing date on the statement is 5/12, should I pay the interest for 5/11?
    2. What could have caused the delay between 5/12 and 5/15? Any ideas?

  6. TFB on June 6, 2009 | permalink
    7.  

    @ManInTrouble – (1) Yes, because typically the loan is funded the day before the closing date. (2) You should ask your settlement agent how and when they did your payoff. If they sent a wire, your old lender should've received it on Tuesday 5/12. If they FedEx'd a check, your old lender should've received it on Wednesday 5/13. If your settlement agent didn't send payoff on time, they should pay you the extra interest. I had this happen to me once. I complained to the settlement agent. They paid me the extra interest because they caused the delay. On the other hand, if your settlement agent did the payoff on time, you should get the wire or FedEx tracking number and complain to your old lender for crediting you too late.

  7. ManInTrouble on June 18, 2009 | permalink
    8.  

    I finally got the issue resolved, but it ain't easy.

    I asked the settlement agent about the overlap interest – no response at all. I escalated the issue to the branch manager. She said she needed some time to investigate. Three weeks later, she still could not provide the details of the closing date to explain the excessive overlap interest. I finally have to talk to the regional manager to get it resolved. No details was given, but they offered me a refund check.

    Once again, I want to thank you for your comments and support. Double thumbs-up for the refinancing event calendar.
    Bravo!

  8. Danny on July 2, 2009 | permalink
    9.  

    My situation is this: I closed 6/23, funds were suppose to disburse 6/30 and for some reason they are delaying. What is my recourse?

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