How to Figure a Home Loan Payoff
Paying off a mortgage loan is not as easy as just calling for a balance and sending in a check. Interest is paid in arrears, so daily interest must be calculated and added to the mortgage balance. If your grand total is less than the lender's calculations, it will not be sufficient to pay off and retire the loan.
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Things You'll Need
- Mortgage statement
- Amortization schedule
- Calculator
- Calender
- Pen and paper
Instructions
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1
Select a target date for paying off your mortgage that is about 10 days from today. Call your mortgage company and ask for a payoff that will be "good" on that target date. For example, say you are doing this on Jan. 15; ask for a payoff that will be good Jan. 25.
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Determine the balance on your mortgage. Count how many payments you have made since the beginning of your loan and find your present month on your amortization (payoff) schedule. This will give you your present mortgage balance.
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Calculate your interest due for January based on your mortgage balance. If you paid your mortgage payment for December (remember that interest is paid in arrears), that included interest for November. If you have paid your January payment (and the lender has posted it), then December's interest has been paid as well. You will owe interest days for January only. For example, if your mortgage balance is $90,000 and the interest rate is 6 percent, you are paying $5,400 per year in interest. Divide $5,400 by 365 days in the year to get $14.79 daily (per diem) interest. Multiply $14.79 by 25 days in January and you get $369.75. Add $90,000 to $369.75, and the total payoff amount is $90,369.75.
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Send your total payoff amount to your lender by or before the target date, otherwise it will cost an additional $14.79 per day that the payoff is not posted. It is best to send out your payoff by overnight service to get it to the lender a day or so early. If they post it a day or two before the target date, they will owe you a day or two days of interest at $14.79 per day. They have to send it to you, since every penny must be accounted for.
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Pay off your FHA loan in the same way; however, there is a "quirk" to paying off FHA loans. They are only allowed to post a payoff on an FHA on the first business day of the month. This means that If you paid your January payment, and call for a payoff that is "good" through the 25th of the month, the interest must be calculated for all 31 days in the month. Using the same example formula, $14.79 per day times 31 days equals $458.49, plus the balance of $90,000 equals $90,458.49 total payoff of your FHA loan. You must be certain that the check reaches your lender on or before the last day of the month so it can be posted on the first business day of the following month. Overnight mail service or Fedex the payment. If it rolls past just one day past the first business day, you will owe an entire month of interest ($90,000 times 6 percent = $5,400 divided by 12 = $450).
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Check the payoff figure that the lender sent to you using the above calculations. Be sure their calculations match yours. If they do not, call your loan officer and make them go over it with you.
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Tips & Warnings
Call your mortgage company and ask about the balance that is in your escrow account (escrow accounts are the accounts that hold each month's payment of taxes and insurance. Not all loans have escrow accounts, so it is possible that you do not have one). After your loan payoff has posted and the lender's system updates itself, a check for those escrow funds will be sent to you.
If there are prepayment penalties or late payments from months previous, they will be added to your payoff balance. In the payoff statement, check the breakdown. If you do not agree with any fees showing, you must call and get these cleared before your settlement check can be sent
