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Mortgage Payoff Amount: How Does It Work and How Is It Calculated?

Monday, January 11, 2021

Most homeowners dream of the day when they can pay off their mortgage. No doubt, owning a home free and clear is an excellent goal to set. Once you reach that milestone, you might even consider celebrating with a mortgage-burning ceremony.

Before you make celebratory plans, there are a few things you'll need to know about what happens during the payoff process. One of the most critical pieces of information is the mortgage payoff amount.

Please read our guide for tips on how a mortgage payoff works and how your lender calculates the amount you owe.

Starting the Payoff Process

Paying off a home loan isn't quite like taking care of other debts. You won't call your lender tomorrow and make a payment over the phone as you do with credit cards and certain other financial obligations.

To simplify the payoff as much as possible, figure out when you plan to make your final payment. Then, contact your lender or the company that services your mortgage. You'll want to do this about 30 to 60 days in advance.

The primary reason to reach out to your mortgage holder is to request a quote for the mortgage payoff amount. If you're not sure who to call, you'll find their contact information on your monthly loan statement.

Your Payoff Letter

At your request, your lender will prepare a payoff letter or statement for you. The document they provide will include your loan balance but may also show a few other details, including:

  • Interest Rate
  • Remaining Payment Schedule
  • Interest Rebate

Your payoff statement will also indicate the good-through date. It's critical to pay attention to this date because you'll owe additional interest if you extend the payoff date past the good-through date. Your payoff amount will change, as well.

If you're selling your home, the title company assigned to handle the closing may request an official payoff statement from your lender. You'll likely need to fill out and sign a formal request, which the title company will submit to the lender.

Calculating the Mortgage Payoff Amount

One mistake many homeowners make when trying to figure out how much they need to pay off their mortgage is to look solely at their latest loan statement. If you have one handy, take a look at it, and you'll understand the confusion.

The monthly statement sent out by the loan servicer reflects the amount of the loan as of the statement date. Remember, interest continues to accrue daily or weekly. Your statement doesn't include any accrued interest past the statement date.

The official payoff statement will include the loan balance plus unpaid interest due.

You Can Estimate Your Payoff Amount

Generally, your lender must provide the payoff statement within 5-7 days of your request. In the interim, you can perform an informal calculation.

Before you begin doing the math, here are two terms that often confuse people:

  • Original Loan Amount
  • Remaining Loan Balance

When thinking about the original loan amount, don't forget your downpayment. Start with the purchase price of the home. If you put money down, you'll subtract that amount from the purchase price since it's not included in your loan.

The remaining loan balance is what you owe today on your mortgage. To get a rough estimate of your loan payoff amount, subtract the amount you've paid toward the loan's principal to date from the original loan amount.

Does Your Loan Have a Prepayment Penalty?

While it's not as common for today's home loans, some lenders charge a prepayment penalty. If a borrower pays off the mortgage within the first two-to-five years of the loan period, they may owe the lender a fee.

Lenders need to earn a return on their investment. If the borrower pays off the loan before that happens, the lender loses its opportunity.

The conditions of prepayment penalties are unique to each lender. Some charge the penalty only if the borrower refinances, while others also charge a fee if the borrower sells their home during the penalty period.

Not sure whether you have a prepayment condition on your mortgage? Check with your lender. Most FHA and VA home loans won't have a prepayment penalty, but you may have the penalty if you have a conventional mortgage.

If your mortgage has a prepayment penalty and you're within the period to incur the fee, you'll see the amount included in your payoff statement.

Other Fees Included in Your Payoff

In addition to your remaining loan balance plus the final month's interest, you'll pay a few other fees associated with settling your home loan. Here are a few charges to expect when you read over the final payoff statement delivered to you by the title company:

  • Recording Fee
  • Reconveyance Fee
  • Payoff Statement Fee
  • Wire Transfer Fee

There may be other charges associated with the transaction, but your title company representative will go over the statement with you to ensure you understand each line item. The wire transfer fee, if applicable, covers the cost your bank charges to transfer funds from your account to the loan servicer's account.

Planning to Pay Off Your Home Loan Soon?

The key to a smooth loan transaction is preparation. That includes requesting your payoff statement well before you plan to pay off the loan. It also means taking the time to ask questions about the final mortgage payoff amount.

It also helps if you have a great team behind you!

Here at Heartland Abstract, we make it our mission to help clients assemble the team of professionals who will help complete their real estate transaction, including title insurance if you're refinancing or purchasing another home. Contact us today for a rate quote or answers to your questions about the mortgage payoff process.

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