How to Calculate Mortgage Prorations
Mortgage pro-rations are used in every closing of a new-purchase mortgage or refinance. Mortgage payoffs, interest pro-rations, taxes and insurance escrow accounts are all prorated to get correct amounts for the origination (beginning) of a new mortgage account. Let's look at how they are done.
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Instructions
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Mortgage Prorations
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Calculate the daily interest on your old loan payoff in a refinance. Call or access your mortgage company online to get your correct balance. Determine daily interest by multiplying the balance, say $100,000, by the annual interest rate of, say 8 percent, for $8,000 per year. Divide that figure by 365 for the daily prorated amount of $21.92 per day.
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Calculate the mortgage payoff with your correct balance. Remember you always pay interest in arrears so if you are closing a refinance loan on Jan. 25, you have made the January payment, covering all interest for December. Factor in the federally mandated three-day rescission period for cancellation, plus enough days to overnight the payment to the old lender. Pay your closer $21.92 per day (following the example above) for 31 days of January interest, or $679.52, plus the $100,000 balance for a total loan payoff of $100,679.52.
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Calculate insurance for the escrow account. You will pay for the entire first year in advance, then pay monthly installments. Note that is is common to "pad" the account by two months. Divide the full year's premium of, say, $850, by 12 months for a total of $70.83 per month, then multiply by 14 months for a $991.67 prorated amount to collect for the new escrow account.
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Calculate property taxes for the new escrow account. Assume tax bills are due in November of each year. If the yearly amount is, say, $2,000, divide by 12 to get a monthly prorated amount of $166.67. If you are closing in January (following from the example above), no payment is due for February since the March payment covers February's interest. Monthly payments for March through October will contain tax payments for eight of the 12 months needed to pay the tax bill when it is due. This means that four are missing; add another two months to pad the account. Pay your closer six months of taxes ($166.67 multiplied by 6) or $1,000.02, at closing.
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Tips & Warnings
Federal law requires a three-day rescission period in a refinance, during which time a person who believes he is making a mistake can walk away from the loan.
Tax pro-rations for closings differ from county to county since bills can all be due in different months. Some counties bill for taxes every six months.
Get a copy of the payoff statement when refinancing. There may be other fees added to the payoff, including prior late fees or even fees for faxing the payoff to your closer. Call your lender if you disagree with the statement a few days before closing.
References
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