Payoffs and Payments
Now that we’re embarking on a refinance together you should know that there are two key factors that impact our estimates and your bottom-line: your payoff and your up-coming monthly payment. If the final numbers come back significantly different from our estimates we’ll more than likely reference this article. Just know we’re doing our best to provide accurate estimates based on information provided at the time.Honestly, this is more information than you really need to know so if you want to stop reading you’re welcome to (because this is pretty technical and boring).
Your mortgage payoff will be more than you think and the exact amount is currently unknown (and won’t be until about 10 days before closing); therefore, our current proposal has a rough estimate for your payoff. This means the amount due at closing will change slightly once the final payoff amount is known. Sometimes the change is for the better, sometimes it’s not. Here’s why:
Per Diem Interest
The per diem interest that is due will be added to your payoff because mortgages are paid in arrears. This means that when Joe Homeowner makes his mortgage payment on August 1st, he’s really paying for the interest owed for July’s 31 days. So when Joe closes on a refinance on October 10th, his mortgage payoff will have 10 days of October’s interest added to it since he hasn’t made a November payment yet.
There will also be per diem interest on the HUD-1 Settlement Statement that will account for the interest that will be due for the rest of the month after closing and funding. For example, if a refinance closes October 10th and then funds on October 14th after the three-day right of rescission, the HUD will collect 17 days of interest to cover interest from October 14th to October 31st.
Your Current Mortgage Payment
Let’s say that in the previous example Joe is closing his refinance on October 10th and his payoff has October’s 10 days of interest added to it. NOW let’s say that Joe hasn’t made his current October payment since it’s not late until after the 15th. In this case Joe’s payoff will have 40 days of interest added to it: the 10 days of October and the 30 days of September’s interest that would have been paid had he made his October payment.
There is nothing wrong with having the 40 days added to the payoff; however, it does mean that our estimates will be less accurate since Joe’s per diem interest is significantly more than initially estimated. That said, in a roundabout way Joe can “skip” two months payments – both October and November’s payments – instead of the normal one.
Skipping A Payment
When you close on a refinance loan you will “skip” the next month’s mortgage payment.* The reason for this is because mortgages are paid in arrears. For example: a closing on October 10th will have interest collected on the HUD from October 10th through October 31st (and interest from October 1 through the 10th will be included in the payoff). The borrower’s first payment is then due December 1st (thus skipping November). The reason why you skip November is because December’s payment actually includes the interest accrued from November 1 to 30th.
Padding The Payoff
As an FYI, mortgage payoffs will typically have a few days of extra per diem interest added beyond closing. BUT don’t panic, you will be refunded any excess amount paid to your mortgage servicer (which is typically tens of dollars so we’re not talking life-changing amounts of money). The refund for the over-payment of interest is typically issued within 30 days after funding.
The reason the payoff is padded is to ensure the refinance becomes official in the unlikely event of a delay. For example, if Joe’s refinance was supposed to fund on October 14th but for some reason the bank didn’t receive the funds until the 15th, the few extra days of interest added to the payoff will cover this delay and the loan will fund. Note: honestly this is extremely rare (and we mean really, really, extremely rare) but lenders want to ensure that you don’t have to re-close because a payoff was one penny short of the full amount due.
Calculating The Payoff
In summary, the payoff is calculated by adding the unpaid mortgage principal balance, adding the per-diem interest owed, and adding whatever payoff fees are charged by the mortgage servicer (typically about $100 to $150). We will order the payoff from your mortgage servicer about two weeks before closing (because the payoffs are only valid for a certain amount of time). Once we have the exact figures we will provide an updated estimate.
Please call us if you have any questions as we’re here to help.
* Technically if a loan funds within the first few days of the month a “short-pay” can be done but that is very rare and beyond the scope of this article.