Mortgage payoff logistics

[Cassius King]

Congrats! I think I would have done the same thing. Should be a peace of mind moment, not stressing over timing/fee's, etc.

[MissMolly]

Quote:

Originally Posted by OMY-Syndrome I just joined the forum today, but I have been lurking for many years. I never really felt I had much to contribute, but I had to weigh in to this topic, because I think I have some info that can save forum members who are paying off their mortgage a few bucks. I paid off my mortgage a few years ago, it was being serviced by Wells Fargo. I happened to know someone at the company that knew how things were calculated, and she explained it to me. I was shocked at what she told me, but I kept track of all my payments and calculated the interest as per how she told me it would be and it came out exactly right down to the penny. I am pretty confident that the way interest is calculated was not unique to WF, I am guess it is probably standard throughout the industry and dictated by language in the mortgage note. When the bank calculates interest, they take your principle balance, on the first day of the month, and multiply that by the annual interest rate on your mortgage /12. Then they add that amount of interest to your loan. The key here is that they use the outstanding balance on the first day of the month. This means if you make an extra payment towards principle on the 2nd day of the month, or the 30th of the month it doesn't matter the amount of interest you pay will be the same. So the moral of this is if you want to make an extra payment towards principle you should make it at the end of the month. Now when it comes time to pay off the mortgage they do things a little differently. At payoff day, they take your current balance and pro-rate the interest depending on what day of the month you are paying it off on. Notice I said they take the current balance, they do not look at what the balance was at the beginning of the month. In other words, if you have a $10,000 balance at the beginning of the month, pay $9,900 on the 5th of the month, and then pay off the mortgage on the 10th, they would figure your last months interest as 10 days interest on $100. It may seem crazy, but this is how they did it for me. As another really cool feature if your mortgage is serviced by Wells Fargo, like mine was. (If it is serviced with another bank I would see if they have this ability too.) The banks computers is hooked into the Mortgage departments computers, so you can ask the teller for your current mortgage balance. You can also make your currently monthly mortgage payment, and extra mortgage principle payments any day you want. You can even pay with cash if you want to. No need to talk to a banker, just go right to the teller. I don't remember for sure on the very last payment, but I think the teller gave me a payoff quote. If she didn't then I probably got the pay-off quote on line, and then took that in to the bank and paid the teller. I do remember the teller congratulating me on paying off my mortgage.

This is not entirely correct. The principal amount due on the first of the month is the same amount due at the end of the month if you don't make a payment. Interest is calculated on the amount due and does not change throughout the month (assuming you don't make a payment). The reason you can't pay extra to principal on the second of the month is because you had not yet paid the payment due for that month. Fannie and Freddie and all the other investors do not permit application of a principal only payment if the payment due for the month has not been paid. So you can pay your principal on the first of the month and extra to principal at the same time. But the payment will be applied first. Or pay the payment on the first and extra to principal on the second - again, the payment due for that month has to be applied first. Paying principal at the end of the month is no different than paying it on the second as long as the payment is paid first.

[Bamaman]

My mortgage was serviced by Suntrust Bank, but who knows who I owed for the mortgage. The home financing business works in mysterious ways.

I went into my local Suntrust and talked to their in house mortgage originator. She was nice enough to call elsewhere and get me the payoff, but she couldn't accept the payoff. Mortgages are kept on a bookkeeping system separate from the bank's general ledger.

I just mailed them a personal check for the payoff amount + 5 days. They cashed my personal check and later sent me the mortgage papers and released the lien. Since it was a straight payoff, time was not of the essence to me.

And yes it's nice not to owe anyone for any real estate. It's an ace in the hole to being able to retire early.

[OMY-Syndrome]

Quote:

Originally Posted by MissMolly This is not entirely correct. The principal amount due on the first of the month is the same amount due at the end of the month if you don't make a payment. Interest is calculated on the amount due and does not change throughout the month (assuming you don't make a payment). The reason you can't pay extra to principal on the second of the month is because you had not yet paid the payment due for that month. Fannie and Freddie and all the other investors do not permit application of a principal only payment if the payment due for the month has not been paid. So you can pay your principal on the first of the month and extra to principal at the same time. But the payment will be applied first. Or pay the payment on the first and extra to principal on the second - again, the payment due for that month has to be applied first. Paying principal at the end of the month is no different than paying it on the second as long as the payment is paid first.

Actually, I was correct, because I was talking about an extra payment.

[MissMolly]

Quote:

Originally Posted by OMY-Syndrome Actually, I was correct, because I was talking about an extra payment.

Actually, no you aren't. You pay interest based on the remaining principal balance. If you pay a payment the first day of the month, your balance is decreased by the amount applied to principal. If you pay another payment the next day, interest is calculated on that new balance. It doesn't stay the same as it was on the first of the month. Interest is always recalculated on the remaining balance each time a payment is made.

[OMY-Syndrome]

Quote:

Originally Posted by MissMolly Actually, no you aren't. You pay interest based on the remaining principal balance. If you pay a payment the first day of the month, your balance is decreased by the amount applied to principal. If you pay another payment the next day, interest is calculated on that new balance. It doesn't stay the same as it was on the first of the month. Interest is always recalculated on the remaining balance each time a payment is made.

Actually, I am correct. The previous months interest is added to the current balance at the beginning of the month.If you make an extra principle payment during the month they do not make any additional interest calculations.The only time they charge a pro-rated interest payment, is when you pay off your mortgage, and when they do that they use the current balance, not the balance at the beginning of that month. I will give you some examples to better explain how this works.For the sake of simplicity in my examples I will use $100,000 beginning balance, 6% annual interest rate, and a $1000 regular monthly payment.

Example 1: Calculating interest when an extra interest payment is made that month.

Month 1
beginning balance: $100,000
Day 1: interest charge for last month: $ 500(6% / 12 = .5%)
Day 1: This month's payment: $ 1,000
Day 1: Balance at end of day: $ 99,500
Day 30: Extra payment: $ 10,000
Ending balance month 1: $ 89,500

Month 2
beginning balance: $89,500
Day1: interest charge for last month: $ 447.50 (6% / 12 = .5%)
Day1: This months payment: $ 1,000
Day1: balance at end of day: $ 88,947.50

As you can see from this example, it does not matter what day that extra principle payment is made. When they calculate interest you essentially get credit like that principle payment was there the whole month.

You can similarly save money by understanding the way they calculate interest when it comes time to pay off the whole mortgage. When they do the pro-rating of interest, they look at the current balance, and the number of days left in the month.In other words you can save money by making a big principle payment, before the final payoff.Here are two more examples to illustrate what I am talking about.For simplicity I will not include any deed recording fees, or other similar fees, as those would be the same in either case.

Example 2: Paying it off all at once on the 15th

Day 1 Beginning balance: $ 100,000
Day 1: interest charge for last month: $ 500
Day 1: This months payment: $ 1,000
Day 1: Balance at end of day: $ 99,500
Day 15: Payoff interest calculated: $ 248.75(15 days at 6% annual = .25%)
Day 15: Final payoff amount: $ 99,748.75
Day 15: End of day loan balance: $ 0

Total payments made this month: $ 100,748.75

Example 3: Making an extra payment before the final payoff
Day 1 Beginning balance: $100,000
Day 1: interest charge for last month: $500
Day 1: This months payment: $1,000
Day 1: Balance at end of day: $99,500
Day 10: Extra principle payment: $ 99,400
Day 10: Balance at end of day: $ 100
Day 15: Payoff interested calculated: $00.25 (15 days at 6% annual = .25%)
Day 15: Final payoff amount: $ 100.25
Day 15: End of day loan balance: $ 0

Total payments made this month $ 100,500.25

Now I understand why people might be skeptical. When the mortgage expert I talked to explained this to me, I was very surprised, and asked her multiple times just to make sure I understood it correctly.When I paid off my mortgage I used this information to minimize my interest. I calculated all the interest just as she said to, and it matched the bank's interest down to the penny.So I got confirmation that this is in fact how they calculate things.

[RetireAge50]

This is a great tip. Thanks! Will give it a try when I pay off my mortgage.

[MissMolly]

Maybe it's just your terminology, but some of your explanations are not exactly correct. First of all, interest is never added to the principal balance (not on an ordinary amortizing loan. Negative am loans are different). We will assume this discussion only involves an ordinary amortizing loan (not negative am, not daily interest). It is part of a payoff quote, yes, but it is not added to the principal balance.

When you have a payment due for Oct 1, and you pay that payment in Oct (doesn't matter what day in Oct) then you pay the interest that had already accrued for Sept and the principal due for Oct. No October interest is paid in the payment. When making a payment, you are always paying the previous month's interest, not the current month’s interest. When you pay Nov payment, you are paying the interest that accrued in Oct, and so on.

If you make an additional payment to principal at any time during October after the payment due for October is made, when your November payment comes due interest is calculate on the new principal amount after the extra payment to principal is made. When you make your Nov payment, you pay interest for October but based on the lower UPB, not the UPB as of the first of October.

When it comes time for a payoff calculation, and if you have not yet made a payment for the month, then you will be charged interest for the previous month (remember, interest is always paid in arrears) and the number of days in the current month up to, but not including the day of payoff. All interest is calculated on the principal balance outstanding as of the date of payoff. If you have already paid the current month's payment, you will only be charged the interest due for the days in the current month up to but not including the date of payoff (since your current month’s payment paid the accrued interest for the previous month). Again, the payoff is calculated on the UPB as of the date of payoff.

You comment that if you make a large lump sum payment to principal in the previous month prior to payoff, the interest calculation at the time of payoff will be based on that lower UPB is correct. Or, you can also make your current payment on day 1, then a large principal payment on that same day or another day. Then after both your payment and principal payment have been posted, you request a payoff and it will be calculated on the new, lower UPB after both the payment and principal payment have posted.

So, maybe this is what you are saying, but just using different words.

After working 34 years in the industry, I think I have a pretty good understanding how this works.

[OMY-Syndrome]

Quote:

Originally Posted by MissMolly Maybe it's just your terminology, but some of your explanations are not exactly correct. First of all, interest is never added to the principal balance (not on an ordinary amortizing loan. Negative am loans are different). We will assume this discussion only involves an ordinary amortizing loan (not negative am, not daily interest). It is part of a payoff quote, yes, but it is not added to the principal balance.

This distinction of whether the interest is added to the current balance or held on some other line item in some accounting journal is not relevant to the substance of this discussion.

Quote:

Originally Posted by MissMolly When you have a payment due for Oct 1, and you pay that payment in Oct (doesn't matter what day in Oct) then you pay the interest that had already accrued for Sept and the principal due for Oct. No October interest is paid in the payment. When making a payment, you are always paying the previous month's interest, not the current month’s interest. When you pay Nov payment, you are paying the interest that accrued in Oct, and so on.

Not sure why you felt the need to say this, In my examples I said that it was last month's interest they were charging.

Quote:

Originally Posted by MissMolly If you make an additional payment to principal at any time during October after the payment due for October is made, when your November payment comes due interest is calculate on the new principal amount after the extra payment to principal is made. When you make your Nov payment, you pay interest for October but based on the lower UPB, not the UPB as of the first of October.

umm... The UPB (Unpaid Principle Balance) after the last principle payment is made in the previous month, will always be equal to the beginning balance of the Next month. In other words the ending balance of the 1st month is the beginning balance of the 2nd month.

Quote:

Originally Posted by MissMolly When it comes time for a payoff calculation, and if you have not yet made a payment for the month, then you will be charged interest for the previous month (remember, interest is always paid in arrears) and the number of days in the current month up to, but not including the day of payoff. All interest is calculated on the principal balance outstanding as of the date of payoff. If you have already paid the current month's payment, you will only be charged the interest due for the days in the current month up to but not including the date of payoff (since your current month’s payment paid the accrued interest for the previous month). Again, the payoff is calculated on the UPB as of the date of payoff.

I really think you are trying to make this more complicated than it really is.

Quote:

Originally Posted by MissMolly You comment that if you make a large lump sum payment to principal in the previous month prior to payoff, the interest calculation at the time of payoff will be based on that lower UPB is correct. Or, you can also make your current payment on day 1, then a large principal payment on that same day or another day. Then after both your payment and principal payment have been posted, you request a payoff and it will be calculated on the new, lower UPB after both the payment and principal payment have posted.

In my payoff example I did not talk about making a large principle payment the month before the actual payoff. However, it seems we agree that if you make a principle payment before your payoff date, the amount of that payment will not be figured in to the partial month interest you pay as part of the payoff. This is the main point I wanted to get across to forum members, because this is the point that is going to put money in their pocket.

Quote:

Originally Posted by MissMolly So, maybe this is what you are saying, but just using different words. After working 34 years in the industry, I think I have a pretty good understanding how this works.

I think you know the jargon, and can do a good job of obfuscating the real issue here. I stand by what I said, and from what I can tell from your jargon filled post you are not disputing any of the substance of what I said. It seems in your first post saying I was wrong, you had missed that I was talking about an extra principle payment. I then laid it out in some nice little example to make sure it was clearer.

I don't think the people here care about mortgage Jargon, they want to know information that they can use to save money. That is what I provided, and I purposefully left out jargon and any undefined TLA (Three Letter acronyms.)

I really don't care what you think, or your ego trip. I did feel a need to respond to you, because my main point is to explain some information that forum members can use to save money when paying off their mortgage. I didn't want forum members to read your very confusing posts saying I was wrong, not know who to believe, and then missing out on a money saving tip.

[travelover]

Mini rant........

Does anyone beside me know the difference between principle and principal? It is hard to come across as a financial authority if you don't know the difference. Reminds me of my lawyer having pre-printed documents with the word "judgement" on them.

Rant off.......

[OMY-Syndrome]

Quote:

Originally Posted by travelover Mini rant........ Does anyone beside me know the difference between principle and principal? It is hard to come across as a financial authority if you don't know the difference. Reminds me of my lawyer having pre-printed documents with the word "judgement" on them. Rant off.......

Spelling has never been my strong suit, but point taken. Although, just for the record I was not trying to come off as a financial expert. Just trying to pass along a tip I found useful and that I used to save money.

It seems like new people are not welcome here, so I am fine with just going back to lurking.

[ChiliPepr]

Quote:

Originally Posted by OMY-Syndrome Spelling has never been my strong suit, but point taken. Although, just for the record I was not trying to come off as a financial expert. Just trying to pass along a tip I found useful and that I used to save money. It seems like new people are not welcome here, so I am fine with just going back to lurking.

I would not worry about it... some people here just need to pass judgement on other posts when they do not have much to add to the discussion.

I found your post clear and easy to understand. Wonder if this is the reason some banks let you pick the day of your payment.

[travelover]

Quote:

Originally Posted by OMY-Syndrome ...........It seems like new people are not welcome here, so I am fine with just going back to lurking.

Don't take it so hard, I thought you were doing a grand job of explaining your point. Bad spelling and grammar on a forum is kinda like participating in a debate with mustard on your chin.

[bingybear]

Quote:

Originally Posted by OMY-Syndrome Spelling has never been my strong suit, but point taken. Although, just for the record I was not trying to come off as a financial expert. Just trying to pass along a tip I found useful and that I used to save money. It seems like new people are not welcome here, so I am fine with just going back to lurking.

Brush it off. I have some words that I mix up too. I usually attribute it to my learning disability that was diagnosed just before I got my masters degree. While my eyesight was good, I was eligible for reading for the blind.
You have a much bigger problem with you user name. If you really have OMY syndrome... you'll never retire! You'll always have OMY.

To the original topic, I don't recall if I used a personal, cashier's or bank check. But I don't recall any website with payoff information. I had to call the bank for the payoff information. But then, that was 1993 and at age 32. I'm sure things have changed... perhaps with the exception of the good feeling knowing that the mortgage is paid off. Congrats!

[REWahoo]

Quote:

Originally Posted by bingybear Brush it off.

+1

Participating on internet forums requires skin of moderate or greater thickness. Don't allow an occasional heckler to spoil your participation.

[OMY-Syndrome]

Quote:

Originally Posted by travelover Don't take it so hard, I thought you were doing a grand job of explaining your point. Bad spelling and grammar on a forum is kinda like participating in a debate with mustard on your chin.

Understood. I will NOT take my ball and go home.

[OMY-Syndrome]

Quote:

Originally Posted by bingybear You have a much bigger problem with you user name. If you really have OMY syndrome... you'll never retire! You'll always have OMY.

Agreed, that is my biggest problem. I will open up a thread in the introduction forum and explain my story. The short version is 5 years ago I set a goal to FIRE in March of 2016. I met the goal for FI, but have decided to stay another year so I can have my kitchen re-done. Classic OMY

[REWahoo]

Quote:

Originally Posted by OMY-Syndrome I met the goal for FI, but have decided to stay another year so I can have my kitchen re-done. Classic OMY

Wow, giving up a year of life retirement to remodel your kitchen. You must be one heck of a cook!

[OMY-Syndrome]

Quote:

Originally Posted by REWahoo Wow, giving up a year of life retirement to remodel your kitchen. You must be one heck of a cook!

No my current kitchen is just that bad from years of LBYM. Although perhaps I am just making an excuse, classic OMY. I should have time to open up a intro thread this weekend. We can dive into my disease there.