One of the most common topics of conversation we hear from those who have recently purchased a home is "have you actually read through your mortgage statement? The amount going to interest vs. principal is so high!"
Individuals and families know that buying a home involves having a monthly mortgage payment with both 'principal' and 'interest' components, but there is always an extra level of surprise when you see the actual dollars going toward interest vs. principal in the early years.
For the portion of borrowers who find themselves in a position to actually payoff the remaining balance on their entire mortgage, there is an added surprise: the "payoff amount" does not = the principal balance left on the mortgage.
Your first reaction might be: "This must be a mistake." But there's no mistake.
Principal balance = the outstanding balance of debt on a loan, which does not include interest or other charges.
Payoff balance = principal balance + interest due, outstanding fees and a possible prepayment penalty (if applicable; more on that below)
Remember when you closed on your house or apartment and had that euphoric feeling when you realized that you didn't have to start making mortgage payments until 1 month after you closed? When you closed in February, your first payment in March will actually pay for February's interest.
Mortgages are paid back in arrears. This means that when you're closing your clock looks forward, but when you are paying off the mortgage, the clock looks backward to collect on the interest still owed to the lender. Whether your new mortgage is a refinance or a purchase, you still have the perk of skipping the first month's payment.
Eventually, that 1 month has to get paid back.
Mortgage banks and non-bank lenders have to calculate the payoff amount by using a 'per diem amount' which = daily interest. You can find the per diem amount on your physical or .pdf monthly mortgage statement. For example, if your loan closes on March 31st, the payoff amount has to include 31 days of interest for March because the payment you made on March 1st only covers February's interest.
If you are paying off your mortgage loan early, you may have to pay a "prepayment penalty."
A prepayment penalty is a fee some mortgage lenders charge if a borrower pays off his/her loan within a specific timeframe. Prepayment penalties are far less common today (ex. Mortgage loans subject to prepayment penalties are ineligible for sale to Fannie Mae), but some mortgages still have this cost under certain conditions. Some lenders will only charge a prepayment penalty if the borrower refinances the mortgage within two to five years.
As you can see it is very important to know -- before you sign -- whether you are subject to a prepayment penalty, and the conditions of this penalty. The terms of the prepayment penalty will vary based on the lender. Look for terms on your mortgage paperwork that say "prepayment penalty disclosure" or "prepayment disclosure" -- you will typically see the specifics of any prepayment penalty listed there.
If you are considering paying off your mortgage, you can request a "payoff amount quote" from your lender or servicer. If your loan is a 'closed-end' loan secured by your house or 'principal dwelling,' once you request this statement, the lender or servicer must provide you with an accurate statement of the total amount that would be required to satisfy all of your obligations in full as of a specific date.
The payoff amount quote gives you the total payoff amount owed, based on a specific date, and it will also include an itemized list of any related charges.
Here are some of the items you may see on a payoff amount quote:
- Principal Balance
- Paid Ahead Interest
- Hazard / Flood Insurance
- Corporate Advances
- Late Fees
- Returned Check Fees
- Other fees or credits
- Deferred Interest
- Unapplied Funds
- Payments Held in Suspense
Additionally, please note the line that reads "This payoff amount is good through _______ (specified date)."
This is the expiration date of the payoff quote. If you do not payoff your account, in full, by the date specified, you will need to request a new payoff amount quote statement for updated information.
Also, until you have paid off your account and it is officially closed, payments are still required, and interest will continue to accrue. Any transactions that happen on or after the quote or expiration date may change the payoff amount.
Clearly, this is a lot of information to absorb, whether you are refinancing your mortgage, selling your house, or paying off the remaining chunk of unpaid principal balance on your mortgage loan.
If you still have questions, please shoot us an email at email@example.com, or give us a call (646-798-1800), and we'll be on the phone with you in minutes.