Posted by Your mortgage balance shows what you owe on your home loan. However, doesn’t a mortgage payoff show the same thing? Not exactly.
Loan Payoff Or Loan Balance?
Both mortgage balances and mortgage payoffs indicate how much is owed on a home loan. However, one fact results in mortgage payoffs and mortgage balances being unequal:
- Balances assume monthly mortgage payments continue while Payoffs do not
Mortgage payoffs tally up to a slightly higher total than a mortgage balance. In fact, the primary difference is mortgage interest.
What Gets Added To A Payoff?
Go online and check your mortgage account – you will see what you owe as of today. That figure is your “mortgage balance”. Your mortgage balance is also what your credit report shows. However, go ahead and request a mortgage payoff from your lender. This number you receive back will be higher than the mortgage balance you just saw online (and on your credit report).
Here is why. Mortgage payoffs include your mortgage balance plus the following:
- Mortgage interest
- Admin fees for processing payoff
- Other fees due not yet paid
The main difference maker of these is mortgage interest. In short, for a payoff total – the mortgage interest accruing between your last mortgage payment made and the date you intend to pay the mortgage off is added up. Then, that total is combined with your mortgage balance to determine your mortgage payoff amount.
Why Add Interest To Mortgage Payoffs?
First and foremost, mortgage interest is charged in arrears. That’s fundamental to this conversation. In other words, a mortgage payment due June 1st pays for interest that accrued May 1 through May 31.
Now, imagine you’re refinancing your current home loan and closing the refi on May 15th. First, your old loan (the one being refinanced) will be paid off on May 15th. Second, you won’t make a June 1st payment on the old loan (it will be paid off and closed).
In the above scenario, your old loan accrues 15 days of interest (May 1 through May 15) and then is paid off by your refinance. Due to no June payment being made on the old loan, the May 1 – May 15 interest that accrues is added to your mortgage balance. The end result equals your mortgage payoff total. Ultimately, this is how the old lender is paid the May 1 – May 15 interest due.
Clear as mud right?