Principal Balance vs. Payoff Balance

by Dave Wirsching on March 18, 2009

One of the most frequently asked questions at the settlement table is:  Why is my mortgage payoff amount higher than the balance showing on my most recent statement?

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.

For example, you receive your February mortgage statement and the principal balance is $210,325. You are scheduled to refinance your existing 6% mortgage on February 2 and when you arrive for settlement, you see that the payoff amount is $211,742.37.  Perplexing?  Yes.  Easily explained, not really, but follow along:

The February statement shows a balance owing of $210,325.  This figure  is what is owed as of January 1 – not February 1.  Why? Because when you made your January 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 December 1 through December 31.

If you have not made your February payment you have not paid the interest from January 1 through January 31.  Thirty-one days at $34.57 a day (see below on how I arrived at $34.57) adds $1,071.67 to the principal amount you owe the lender for a total of $211,396.67.

But, the payoff is still $345.70 higher.  Dont forget, you have to pay interest to the lender until it receives the payoff from your settlement agent.  In this case, an additional 10 days of interest at $34.57 or $345.70.  Why ten days?  We assume that this property is subject to the right of rescission and the funds to pay off the mortgage won’t be released to your settlement agent by your new lender until February 6.  The payoff will be sent to your former lender by overnight courrier.  February 6 happens to fall on a Friday so we have to allow until Monday for delivery which is the 9th.  Where’s day number 10?  Experienced settlement agents know that you have to allow at least one day for unforeseen problems – snowstorms, airport delays, etc.

How did I arrive at the per day rate of $34.57 – or the per diem?  Simply take the principal balance of $210,325 and multiply it by your current rate of 6% which equals yearly simple interest of $12,619.50 divided by 365 days in the year for a per diem of $34.57.  Some lenders will use a 360-day year which increases the per diem and in our case to $35.05 – that’s about a 70 cents per day difference or $252 a year in additional interest.

Keep in mind that the lender being paid-off will refund to you any overpayment in daily interest.

{ 2 comments… read them below or add one }

1 Colleen August 14, 2012 at 3:02 pm

I’m in the middle of a re-fi and they just told me my payoff balane, but it’s excessively high. I’ve made all payments on time. My balance is 93k but they say my payoff amount if 97.5k. That’s 4500.00 and seems like an awful lot and definitley doesn’t follow the one months interest rule. Any idea why it could be so high? Thanks.

2 Francine D'Elia Wirsching August 14, 2012 at 5:17 pm

Hi Colleen, a principal balance is different than a payoff balance; however, $4,500 is a lot, even if you hadn’t made your August mortgage payment. Could your escrow account be overdrawn? Maybe a duplicate payment was made from the account; therefore, leaving a deficit. Is your current loan FHA? Is there a MIP fee being assessed. Prepayment Penalty? Ask for the written payoff statement and make sure you can account for every dime on the payoff statement before moving forward. You can also ask for an account history showing all money in and out of your account. I have definitely seen insurance premiums and taxes paid in duplicate. Keep us posted! Thanks for your comment. Francine

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