The Finance Buff

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 two days of overlap for which you are paying interest on both loans. You want to make sure you minimize that overlap to only 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).

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 by one day. She also said that not all lenders accept payoffs by wire. I revised the calendar accordingly.