Selling a home is a lot of work, but you have a buyer and he is ready to close. When the attorney or title company begins gathering information to complete a closing, a correct payoff amount is imperative. "Shorting" payoff to the lender will not induce it to release its lien so that the new buyer can close with a clear title. There is no room for error here. The payoff must be calculated precisely.
Present your account information to your real estate agent. If there is no agent involved, find out who is closing the loan for your buyer, and have him provide you with a form for information release. This will enable him to speak to your lender on your behalf to request a payoff of your mortgage. Provide the closer with all account information and phone numbers for lender contact. Some lenders are very slow to provide payoffs while others will only mail out the payoff, so be sure to provide this information early. If you are not selling your home and there are no closers or agents involved, you can call your lender and request payoff based on a particular date yourself. Be sure to ask for the amount of your escrow balance, too.
Follow up with the closer to find out if the payoff has come in. In calculating the payoff, the lender will include all interest days in the month of payoff, down to the date they receive your payoff. Watch out for surprises, as she will also include late fees (if any) and any other charges she deems credible. It is recommended that you have a copy of your note, and go over the payoff. Call your lender to question them for discrepancies.
Locate a calculator, and using the balance on your last statement, add the per diem (daily interest costs) accrued for all of the days until the lender actually receives payment. For simplicity's sake, let's say you are closing on May 15, and the balance on May 15, was $50,000, and your interest rate is 6 percent. Use the balance amount X 6 percent, which will give you a yearly amount of $3,000. Divide this number by 365, which gives you $8.22 daily interest. Interest is paid in arrears, so you need to be certain that May's payment was posted. May's payment would cover April's interest due, so you would owe interest for 15 days in May. Remember that you have to cover all the days until they receive your payoff, so look at a calendar, and count 15 days then add 6 more days just to be sure. That adds up to 21 days X $8.22 per day, which totals to $50,172.62 for payoff. If the lender posts your payoff earlier, he will owe you, and will send you the overpayment.
Compare your own calculations with lender payoff to see if they come close to matching. If they are not even close, check the payoff statement to see why. Your Note (which you were given at your last closing) will detail exactly how the loan was set up and scheduled. It will tell you if there is a prepayment penalty instituted, and when it drops off. If there is a prepayment penalty, you will need to find out the amount, and add that to your payoff amount.
Check with your lender to get a balance on your escrow account. If you pay a portion of your taxes and insurance with each payment, there will be a balance of these funds accumulating each month. Lenders do not subtract this amount from your mortgage balance, so it will be sent to you after they receive your payoff and close out the account. If you have an FHA loan that is being paid off, ask your lender if you are due any proration of the MIP (Mortgage Insurance Premium). There is a form for that request, so be sure to ask for it. If you have a conventional loan with PMI, (Private Mortgage Insurance), ask the lender if you will be due any portion of it.
If you are paying off an FHA loan, payoffs are posted on the first business day of the following month after you close. This is not a prepayment penalty, but go back to your interest days calculations. Get out your calendar and add all of the days in the month, plus one. This would require 31 days in May, plus one, making it 32 days X $8.22, plus the payoff balance of $50,000, making the total $50,263.04.
It is advisable to have all payoffs overnighted to the lender. Those interest days add up fast. You will save more money in interest days than the cost of an overnight fee, plus it can be tracked online.
If you have been escrowing your taxes and insurance, remember to call your Homeowners Insurance provider and let them know that you are paying off your mortgage and what your plans are so they will know to bill you directly (if you are not selling your home).
When you purchased your home, you may have received grant money for the down payment. When the title is pulled, that grant obligation will show up as a lein. Not all grants are gifts, some have to be repaid. This is another payoff to calculate, and the balance must be added to your first mortgage payoff.