It's definitely a downer when you realize your mortgage payoff is more than your stated balance. When you look at your mortgage, it's only natural to think that if you borrowed $200,000, you only have to pay back that $200,000. However, when you take into account accrued interest, cancellation and administrative fees, and prepayment penalties, you will realize you owe quite a bit more than you borrowed. With most refinances, you will roll the amount you owe, plus all additional fees into your new loan. In fact, you can't refinance for only what you owe on your balance unless you take care of the rest out-of-pocket.
A mortgage accrues interest on a daily basis. For every day your obligation exists, the bank charges interest, known as a per diem. Even though you make your payment every month, you still owe interest for every day until your next payment. When you ask for a payoff figure, it includes interest from the date your last payment was applied until the date you pay off the loan. So if you pay your mortgage off on the 15th of the month, but your interest is paid through the 10th. You will have to pay five additional days of interest when you close the loan. To avoid rolling this into your new loan, you have to come out of pocket. If you go this route, it’s a good idea to schedule your closing as close as possible to the date of your last payment.
Prepayment penalties can be a biggie when refinancing a loan. When a bank approves a 20 or 30 year mortgage, it expects to collect interest on that loan for 20 or 30 years. The earlier you pay off, the less value your loan provides to the bank. To lessen the impact of losing your loan, the bank will institute a prepayment penalty. If you refinance with another lender, you have to pay a percentage of your principal balance as a penalty. For example, on a $200,000 loan with a five percent prepayment penalty, you will pay the bank $10,000. This can be a hefty amount to have to put up by yourself. If you can’t come out of pocket you have two choices to avoid rolling it into your new loan. You can negotiate with the bank to remove it. Good luck with that. Or you will have to wait until your prepayment penalty expires. Check your original promissory note for the details.
When you refinance a mortgage, your existing lender cancels the lien with the county clerk. The cost to mail and cancel the mortgage is rolled into your payoff amount. Although it's usually a nominal sum, no more than $100 or so, it would still be extra money on top of what you already owe. To avoid adding this to your new loan, request that the lender send the mortgage endorsed for cancellation directly to you. You can take the document to the county clerk and pay the recording fee right there. It’s a little bit more effort on your part, but it won’t add to your principal balance.
Depending on the type of loan and your situation with the lender there may be additional fees you will have to pay out of pocket to avoid adding to the balance you owe. Some banks charge a small fee, between $25 and $75 for faxing a payoff letter. If you have any late charges, you will need to pay these with the loan. Also, lenders sometimes add miscellaneous charges for unpaid items such as legal fees, appraisals or taxes. Review your payoff letter carefully to see exactly how much you will have to pony up on your own to avoid refinancing for more than what you owe.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.