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Understanding Your Mortgage Payoff


When a consumer refinances their mortgage, a payoff demand is provided by their current mortgage holder to itemize the amount needed to pay off the mortgage on the future estimated closing date of their new mortgage. 

The payoff demand will include the outstanding principal balance owed, interest that is due since the date of their last payment through the future estimated closing date of their new mortgage, mortgage insurance (if applicable), unpaid late fees, impound account shortages and any other fees due.

It is important for a consumer to understand that the balance on their last mortgage statement is not going to be the amount needed to pay off their mortgage on the future estimated closing date.  To understand how a consumer's bank arrives at the total amount due to pay off their mortgage, a consumer must understand that mortgage interest is paid "in arrears."  For example, the mortgage payment that is due in November does not pay November's mortgage interest forward, it pays the interest that accrued in the previous month of October.  Therefore, if a consumer refinances their mortgage in November, and thus does not make their November payment that would have paid the interest and mortgage insurance that accrued in October, then the amount of interest and mortgage insurance that would have been paid by November's payment will be added to the payoff demand provided by the consumer's current mortgage holder. 

Additionally, using the example above, since that consumer will not have their mortgage in December (because they completed their refinance in November), the December payment that would have paid the mortgage interest and mortgage insurance accrued in November will also be included in the payoff demand.

Therefore, the payoff demand for a consumer refinancing in November will contain the principal balance due from their previous statement plus the interest and mortgage insurance that would have been paid by November's and December's monthly payment plus any late fees, escrow shortages and fees charged by their bank for the payoff.