You’re selling your home or refinancing your mortgage and at closing, you see that the payoff amount is a bit higher than the principal balance. Why don’t the two numbers match up? This is a common question we receive. Here’s the relatively simple answer.

The number you see on your mortgage statement is the principal balance, not the payoff amount. The payoff amount showing on the settlement statement takes into account the principal balance plus interest accrued for the number of days between the statement and a few days after the closing.

Mortgages are paid in arrears, which means the amount you pay is for the previous month. For example, if you pay your mortgage on May 1, you’re paying for the period of April 1 through April 30. Your interest on the principal balance is accrued on a monthly basis also, but it cannot be charged until the month ends. So, if you close on May 15, the payoff statement from the mortgage company will include the principal balance plus the interest accrued from May 1 through May 15.

Also, it takes a few days for the payoff to be sent to the mortgage company. Sometimes the lender requires that certain documents must be sent before the funds are dispersed. Or sometimes the deed must be officially on record in some jurisdictions before the payoff is sent. And if you’re closing on your primary residence, the funds usually aren’t sent for up to 7 business days to accommodate for the 3-day right to rescind. All these extra days add interest to the payoff statement.

We hope that clears up this common confusion! Remember, every effort is made to accurately calculate the amount of interest owed, no more and no less, to ensure that everything goes smoothly on closing day. Still have questions? Contact us today!

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