This is a common question posed by borrowers. When refinancing, “why does my new lender show that I owe more on my current loan than I thought?” It’s a good question.
Depending on who is your lender, you have either a coupon book to make your payments or you receive a statement each month with a payment stub attached. If you have a coupon book, you do not regularly see what your balance is since the coupon will not show this information. However, if you receive a monthly statement, most lenders do update what they have on file as your “principal” balance. You will see this number somewhere on the statement. So, why then when you refinance does the paperwork say you owe your lender more?
The simplest answer is that the principal balance never reflected what you actually owe to your lender. You owe your lender an amount referred to as the “payoff.” The payoff is calculated with interest up until the day the loan is paid off. As opposed to the “principal balance” you saw on a statement which could be from 30 days ago.
In addition, the following might be added to your principal balance to get the final payoff:
- Miscellaneous fees
- Recording fees
- Mortgage payments still due
- Unpaid late fees
- Underfunded escrow account balances (negative escrow)
Some borrowers think something is amiss with this. Not at all. In fact, the borrower’s current lender provides us with the payoff amount in an official payoff statement with a copy sent to the borrower. The new lender pays the current lender as per the payoff received. In the early stages of the refinance, we must estimate the payoff amount since it will take a few days before we obtain it from the current lender. It’s always best to overestimate the payoff by a small percentage. Final numbers are revised when the payoff is received.
Questions? Give me a call.
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{ 2 comments… read them below or add one }
i’ve never been clear about this after having 4 different morgages. just trust you all got it right. :0
We tend to get it right Chuck. If you were refinancing, your current lender provides us with a payoff statement. They tend to be right on the money. Like my play on words?