Mortgage Payoff Interest after Refinance

Question

I'm about to close (later tonight) on a refinance of my primary resident mortgage, but I'm a little confused on how the mortgage company got to my payoff figure.

The disbursement date of the new loan in 8 Dec 2020, so I believe I should only be paying interest on my old loan at 3.75% for the period from 1 Dec to 8 Dec. The interest payment for the entirety of Nov 2020 was ~$1235, but in the payoff statement my current mortgage company is charging me ~$1800 of "Interest at 3.75%". Doesn't that seem much too high for just 8 days?

It's also my understanding that I will need to pay interest on the new loan from 8 Dec to 31 Dec (but not 1 Jan 2021 to 31 Jan), and then my new regular payments will become due on 1 Feb 2021. But the 22 days of interest collected on this new loan should be at the new interest rate of 2.5%, I believe. Is my understanding correct?

Answer 1

The new mortgage company gets the current balance from the existing mortgage company, and calculates any accrued interest that will need to be paid off. They probably got that balance well before the closing date, and were calculating more than a month's worth of accrued interest (and didn't account for a payment being made in between). So it's a "conservative" amount from their point of view to make certain that the old loan is paid off completely (and the lien can be released).

I also recently refinanced, and the "payoff amount" was much higher than the balance at the time plus accrued interest according to my calculations. The explanation that I got was that it included a "buffer" in case there were any delays in payment, discrepancies in the escrow account (even though I don't use an escrow account) or other unanticipated differences, but that my current mortgage company would refund me the difference. Sure enough, after about a week I received an "escrow settlement" for the difference. Other than having to have a little more cash at closing, everything worked out in the end.

You have probably also made a payment since the payoff figure was calculated, so your actual payoff will be even less if they did not take that into account.

Any interest between the date of closing to the start of the month before your first payment should be included in the closing settlement as "prepaid interest" and calculated at the new rate of interest (since that's the rate of the loan you're taking out). So yes, your understanding is correct.

Answer 2

Mortgage interest is billed in the month after it is accrued. So interest owed at the beginning of December was calculated from the loan balance times the daily interest rate for each day in November. It's also likely that they anticipated the loan payoff, and rolled all future interest (Nov 1 - Dec 8, for example) into the payoff amount.