Calculating your loan pay-off

When you apply for a refinance, one of the documents the new lender will require you to sign authorizes it to request a payoff statement from your existing lender. This is the case even if you are refinancing with the same lender. The new lender should give you a copy of the statement when it gets it. If the loan officer quoted above had simply provided the statement, he could have avoided arousing the borrower’s suspicions by spouting gobbledygook.

While no two payoff forms are exactly alike, they all provide the same basic information. The bottom line is the total amount the borrower has to pay the lender on a specific payoff date to eliminate the borrower’s debt. Assuming the payoff date is Oct. 7, and that the borrower has not yet made the payment due on Oct. 1, the payoff amount consists of the following:

• The loan balance as of the end of September;
  
• Plus interest for the month of September (which would have been in the payment due Oct. 1;
  
• Plus interest for the first six days of October;
  
• Minus current escrow balance;
  
• Plus payoff fees;
  
• Plus other unpaid debts.
  

If the borrower had made the mortgage payment due Oct. 1, the loan balance would be reduced by the amount of the payment that constituted principal, and the only interest due would be for the first six days of October.

The daily interest covers the period until the payoff date, except on FHA mortgages, where the payment covers the entire month. Evidently, the Federal Housing Administration’s accounting system can’t deal with days, only months. That means that it is a good idea for borrowers refinancing out of an FHA mortgage to close as close to the end of the month as possible.

Not all lenders deduct the escrow balance from the payoff amount, and there is no requirement that they do so. In such cases, the borrower will receive a check some weeks later. That is a deplorable practice because during that period the borrower is in effect maintaining two escrow accounts. This is important for the borrower to know about.

The payoff fee will be called different things by different lenders, and there could be two of them, but the amounts are small — on the order of $50 or so.

Any unpaid debts due the lender will also appear on the payoff statement. The most common are late charges, which in some states are difficult for lenders to collect if the borrower refuses to pay them. They can’t refuse at payoff if they want the refinance to go through.

Written By: Jack Guttentag
professor of finance emeritus at the Wharton School of the University of Pennsylvania and mtgprofessor.