If you have a mortgage, you know your payment is due on the first of every month. But did you know that unlike rent, which you pay on the 1st of the month for the month you are in, your mortgage interest is paid in “arrears”? Typically, you have a 15 day grace period before a late fee is assessed and the bank won’t report you “late” to the credit bureaus unless you’re 30 days late.
Why does this matter? Because when you sell or refinance, you have to pay off the mortgage, and many people are surprised when they see the actual payoff is much higher than the balance on their statement.
Here is how it works . . . .
Let’s say it is March 1st and you are planning to put your home on the market on March 15th. All goes as planned and it hits the market on March 15th. Because it is a very busy and competitive spring market, you get a full price offer for $258,000.00 with closing on April 20th.
You know you need to net a minimum of $40,000.00 to cover moving expenses and the down payment on your next home. You know your mortgage balance is $200,000 because you just received your statement in the mail and it reflects the March payment you made on March 1st. You run the numbers …
Sales Price: $258,000
Less Commission: $15,480
Less Other Closing Costs $2,000
Less Payoff: $200,000
You think . . . it’s a little tight, but it works. You decide to accept the offer.
Everything is going along nicely. You decide to skip the April payment since you are closing before April 30th (ten days before the mortgage company would report it late to the credit bureaus on the 30th). You figure there will be a little extra owed for April but it can’t be more than $500.00.
Two days before the closing, you receive the final numbers and you see that your proceeds are $38,931.88. You panic slightly since you need at least $40,000.00.
After looking over everything, you notice the payoff is $201,564.26. You call the title company to let them know there is an error since you have a statement that shows you owe $200,000.00, not $201,564.26. They explain the principle balance IS NOT the payoff and since you did not make your April payment, the payoff “includes” your April payment. The breakdown is as follows:
Principle Balance: $200,000.00
Interest from 3/1 to 4/30 at 24.66 per day: $1,504.26
Late Fee assessed 4/16: $30.00
Payoff Statement Fee: $30.00
Total Payoff: $201,564.26
It is important to be aware and ask plenty of questions when you are selling or refinancing. There is nothing less fun than getting less money than you were expecting after thinking you planned so well.