Have you ever sent a loan payment intending to pay off your credit card balance in full only to get a notice the next month saying that there is still a balance due? This typically happens because your monthly statement does not reflect interest that is accruing from the closing date of the statement until the day your payment is received.
To make sure you pay off any loan balance in full, it is advised that you request a payoff letter. This letter, issued by the lender, states a precise payoff amount that is valid up to a certain date. As long as your payment is received by the date specified in the letter, your loan will be fully paid off. Payoff letters are common when paying off auto loans and credit card balance. They are also important in real estate transactions.
Your Mortgage Balance Is Not Your Pay-Off Amount
The balance on your mortgage statement is rarely the amount you need to remit in order to pay off the mortgage in full. Accrued interest, deferred payments, and/or early payment fees need to be calculated by the lender in order to determine the payment that truly fulfils your loan obligation.
During the sale of a home a payoff letter is typically requested by the title company servicing your closing. It will specify the amount the buyer needs to pay in order to satisfy the seller’s loan. The transfer of ownership can only take place when the seller’s loan is paid in full and title is released to the buyer.
Timing is always delicate in a real estate transaction. Release of funds, clear title, and myriad documents need to be ready on time in order for a real estate closing to take place. Any delays in the closing date that go past the date on the payoff letter can make the payoff amount invalid necessitating a new letter and matching funds from the buyer.
Other Uses for a Payoff Letter
You also need the information in a payoff letter before you refinance the mortgage or you choose to pay off the mortgage early. The letter will have the amount to pay and will often include special payment instructions since a full pay off maybe processed by a different department than the one handling monthly payments.
Whether you are selling, refinancing, or pre-paying a mortgage or other loan. Remember to contact your lender for a payoff letter. This document is the most secure way to ensure that you make a full payment for the proper amount and in the proper manner.