Two emails landed before I had finished my coffee, both asking about the same thing, and both of them had read the same version of it somewhere.
The version goes: refinance, skip two mortgage payments, get a refund from escrow, walk away with ten thousand dollars.
It is not a lie. It is a true sentence with the expensive half removed, and I would rather you heard the whole sentence from me than the good half from somebody with something to sell.
The two payments you skip
You really do go a stretch without writing a mortgage check. That part is real and it feels great.
Here is the part that gets left off. Mortgage interest is paid in arrears, which means you pay for the month you have just had rather than the month coming. So when the old loan closes out, the interest for that period does not vanish. It is collected at closing and rolled into the new loan.
You did not skip it. You financed it. You will pay it back with interest over the length of the new loan, which is a completely reasonable trade if you need money now, and a bad one if you were told it was free.
The escrow refund
Escrow is the account your lender keeps to pay your property taxes and your insurance. When your old loan closes, whatever is sitting in that account comes back to you.
That is your money. You put it there. It is not a gain, it is a return, and the new loan is going to want a new escrow account funded, so a good part of it walks straight back out again.
Debt consolidation, said properly
This is the one I get asked about most and the one I am most careful with.
If you are carrying a serious balance on credit cards, the interest on that is in a different league from the interest on a house. Moving it is not a crazy idea. I have seen it be the right call and I have watched people breathe again afterward.
But be clear about what is happening. Credit card debt is unsecured, which means if it all goes wrong, they cannot take your house for it. Move it onto the mortgage and it is secured, and now it is the house standing behind it.
That can still be worth doing. It is never a free thing to do, and anybody who presents it to you as simply cheaper is only telling you about the interest rate and not about what you just put up against it.
What a refinance is actually good at
Changing the shape of something you already have. A different length. A different structure. Getting out from under something that made sense when you signed it and does not now.
What it cannot do is make a debt smaller by moving it. Only paying it does that.
I am not going to write one that leaves somebody worse off than they started, which occasionally means telling people no. It is the least popular part of the job and it is the part I am most sure about.
The one takeaway
A refinance moves a debt. It does not delete one.
§The words in it
Every word above worth explaining.
Open one for what it means and the question to ask back. Nothing here is jargon you are supposed to already know.