When you receive your monthly statement from your mortgage lender, the unpaid balance IS NOT the amount necessary to pay the loan in full. This is merely the principal balance as of the first day of the previous month.
Your March statement shows a balance owing of $200,000. This figure is what is owed as of February 1 – not March 1. Why? Because when you made your February payment to the mortgage lender, you were paying interest in arrears – you pay the interest for the previous month – in this case interest that was due from January 1 through January 31.
You will pay interest to the lender until it receives the payoff from your settlement agent. The settlement agent will determine the amount to collect for payoff. At times there will be a few days interest as a cushion. Keep in mind that the lender being paid-off will refund to you any overpayment in daily interest.
So how do you determine your payoff amount?
The title company will order a payoff letter from your mortgage servicer to find out the precise payoff amount.
What if you’re trying to prepare an estimate and would like a figure?
You can always call your lender and obtain a payoff from them over the phone. Some lenders will calculate a payoff amount for you online as well. Just remember to add a few days to the closing date so that you have allowed for a cushion.
To estimate, use this trick: take your principal balance and add to it a monthly payment. Assuming that you are on time with your payments, this number should always be a bit higher than your actual payoff, but at least this way you will be overestimating instead of underestimating, which is typically the case when you use the principal balance as the payoff amount.
Paying Off an FHA Loan
The daily interest covers the period until the payoff date, except on FHA mortgages, where the payment covers the entire month. Evidently FHA’s accounting system can’t deal with days, only months. That means that it is a good idea for borrowers refinancing out of an FHA to close as close to the end of the month as possible. This rule may be changed in 2015.