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John Moran

Why is a mortgage loan payoff always higher than the current principal balance?

Thursday, August 8, 2013 - Article by: John Moran - Simplify Mortgage - Message

The interest on a home mortgage is paid in arrears. This means that you pay interest for each month with the next mortgage payment (meaning you pay the interest for January with the payment on February 1). Therefore, whenever you pay off your loan, you will owe a certain amount of interest to your old bank from the last payment up until the closing. This amount will vary depending on the interest rate of the loan you are paying off and the day you close your new loan or sell your house. A good guess is to add about 75% of your monthly payment on the old loan to the current principal balance of that loan. This should give you a good cushion and be close to the final figure for your payoff amount. The other side of interest in arrears is that when you close on a new loan, you "skip" a payment, meaning that the first of the month passes one time without you paying a mortgage payment. The truth is that between the higher payoff and interest per diem or "prepaid interest" on your new loan, you have already paid those 30 days of interest.

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