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Tuesday, February 8, 2011

Determining your mortgage payoff amount

Your mortgage payoff amount can be determined by looking at your mortgage amortization schedule,  calling your mortgage lender and  requesting specific loan payoff amounts and dates in writing. The mortgage payoff amount may include outstanding debt plus any interest, fees and escrow taxes owed on a mortgage loan contract.
Mortgage APR includes fees in addition to interest charges
Mortgage amortization schedules outline monthly interest and principal payments

Some methods for determining mortgage payoff amounts are discussed below. Determining your exact mortgage payoff amount may vary between lenders due to differences in lending policy, amortization formulas, interest rate calculations, billing cycle and fee structure. For this reason online mortgage payoff calculators may not be exact due to other fees, and/or a difference in the way the calculator performs interest calculations. Nevertheless, mortgage calculators are useful for estimating mortgage payoff amount.

The amortization schedule

The amortization schedule is very helpful in determining your mortgage payoff amount because it shows you how much is due after each billing period for the life of the loan. If you don’t have a recent statement but do have a loan amortization schedule that includes a full payment schedule, the early mortgage payoff amount may be viewable on the column stating total remaining balance of the mortgage.

Amortization schedules often have high front end interest payments and non-adjusted periodic payments. In other words, the periodic amount due does not decline alongside the balance of the mortgage, rather, more principal is paid and less interest is paid over time. The following video illustrates teh concept of amortization and how it works:

Interest can be calculated in more than one way.  The total interest can be calculated and divided by the number of payments, or the interest can be calculated monthly. The latter leads to a much higher interest due i.e. the shorter the compounding period, the higher the amount due. For example, a $200K mortgage with a 5% interest rate charged once and divided by a 15 year period loan would be a total of $10,000 divided over the life of the loan. However, if the interest is calculated annually, around $10,000 would be closer to the amount due in the first year alone.

How amortization is calculated

Amortization is calculated by taking the total amount of the mortgage due,  multiplying that amount by the interest rate due divided by the compounding period ex. monthly adding that interest to the base amount divided by the term of the loan in months and  repeating the process for each month.

For example, a $200,000 mortgage over 15 years, paid monthly would be $200K / 30 x 12=$200K / 180=$1,111.11 (Monthly base mortgage amount due). Add to this the monthly interest which for the first month equals, $200K x .05=$10,000 / 12=$833.33 + 1,111.11 = $1944.44.

The process is then repeated with the new starting balance i.e. $200K -$1,111.11= $198,888.89 x .05=$9944.44 / 12 = $828.70 + $1,111.11 = $1,939.81. However, since mortgage payments are often the same every month, the difference in interest will be added to the principal i.e. $1,944.44-$1,939.81= $4.63 + $1,111.11= $1,115.74. To created your own amortization schedule using Microsoft Excel, follow the instructions in the video below:

Other useful mortgage payoff items and tools

• Mortgage loan payoff calculator

A mortgage loan payoff calculator may also be of assistance in either getting a rough estimate of how much you owe or will owe on a specific mortgage loan, or on finding the exact amount of no other input variables are needed to determine the exact mortgage payoff amount. These financial calculators ask for the duration, rate and payment of the mortgage and calculate a payoff amount automatically.

• Lender payoff statement

Mortgage lenders have records of your mortgage amount due, interest accrued, fees, payment history, and escrow. Paying off a mortgage early can involve calculating the interest due to the day and depending on the mortgage terms, calculation of this interest may not follow a standard compounding formula.

It can be helpful to request a payoff document from the lender specifying the amount due, with the date it must be paid by to pay off the mortgage minus any unused collected tax payments. These documents may be called a Mortgage Payoff Letter, Mortgage Payoff Pro Forma, or Mortgage Pre-payment Statement but may also be termed independently by the financial institution. When requesting a payoff letter it might also be useful to refer to these mortgage payoff legal tips.

• Mortgage bills

If your mortgage contract allows early payoff of a mortgage without penalty, or if the mortgage must be paid off the amount owed should be visible on a statement issued by the mortgage company. These bills may show the amount due for a given month so pay off before or after the billing cycle due date may require under or over payment. Statements can also be different depending on the type of mortgage. For example, a variable rate non-reverse mortgage statement.

Mortgage payoff tips

• Calling the mortgage lender to inquire about early payoff is a good idea as they may have a specific procedure for handling mortgage payoffs. Often there is a payoff expiration date, after which the total payoff amount changes.

• If paying by check, a cashiers check may be required. Always have a record of how and where the payment came from and to whom it was paid.

• Amortization schedules also show monthly amounts due so the number on these mortgage documents may only be accurate if the payment is processed the day of the end of the billing cycle.

• Make sure there is no pre-payment penalty or fee in the mortgage contract. If pre-payment is not allowed you may receive credit as illustrated in this pre-payment credit letter.

• Amortization formulas may vary making a pre-determined amortization payoff amount incorrect. Confirming the amount due with the lender can resolve any numerical discrepancies.

• Utilize a Mortgage Payoff Affidavit to legally affirm and document the payoff.

• Paying off the mortgage in person with the mortgage lender may facilitate obtaining better records of the mortgage payoff.