May 30, 2020
If you are selling your home or refinancing your current mortgage, you will likely have to pay off an existing mortgage. How the payoff is calculated is one of the most common questions we get as a title company. I answer that question in detail below.
Mortgages are paid in arrears, unlike rent. Rent is typically due on the 1st of the month for the upcoming month. For example, on June 1st, rent would be paid for the period of June 1st through June 30th. Mortgages are also typically due on the 1st of the month however, since interest is on the principal balance is accrued on a month basis, it cannot be charged, or paid, until the month ends. Therefore, the payment you make on June 1st, would be for the period of May 1st through May 31st.
When you are selling or refinancing, the title company will order a payoff statement from your mortgage company. The payoff statement lists the principal balance and the interest due through your closing date. If you are closing on May 8th and have already made your May 1st payment, the principal balance shown will be as of May 1st and interest from May 1st to May 8th. If you are closing on May 8th and have not made your payment due May 1st, the principal balance shown will be as of April 1st and interest from April 1st through May 8th.
The payoff is rarely sent to the current mortgage company on the day you close. Several things must be done or must happen before funds are disbursed. The Lender may require we send certain documents before they will send the wire to fund the loan and authorize disbursement. In some jurisdictions, the deed and/or new mortgage must be on record before we can disburse. If you close on your sale on May 8th, the payoff will likely not be sent for 1-2 days. If you close on a refinance of the mortgage on your primary residence, the payoff will likely not be sent for 5-7 business days due to the 3 day right to rescind. You may also notice a few extra days of interest included in the payoff. This is to allow for any issues that may come up that may delay disbursing the funds.
You should work closely with your realtor and/or lender as to whether it makes sense to make a payment that comes due while you are under contract or in the process of refinancing.
Please note that every effort is made to ensure the accuracy of the payoff when we calculate it. If there is an error, it would be the responsibility of the mortgage holder to rectify.