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I have owned my home for two years with a loan of $177,000.00. My monthly payments are $706.00 and I have an interest rate of 3.5%. I have just won a large sum of money and would like to use some of the winnings to pay off my mortgage, which currently has a balance of $173,000.00.

I understand that most of my monthly payments go to interest. What should my actual payoff amount be?

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    Are you asking what the amount is that you need to pay off your mortgage? Your lender can give you the exact amount. It will be close to the balance. – Ben Miller Dec 18 '17 at 15:02
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    Congratulations! Your payoff will be $173K plus whatever interest has accrued since your last payment (some amount less than $706). Yes pay it off, then start investing the rest plus $700/mo (just so you don't do something dumb with the winnings) – D Stanley Dec 18 '17 at 15:02
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    At 3.5%, it might make sense to not pay it off, but to instead put that cash in a higher yield investment, depending on your risk tolerance. – whatsisname Dec 18 '17 at 16:51
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    @whatsisname, I understand where you are coming from. However, there is something to be said for the value of the peace of mind that comes from having a paid off house. – Kevin Dec 18 '17 at 17:29
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    I always figured the very first thing I would spend a large windfall on would be a competent Certified Public Accountant. Then they could advise me on my exact situation and help me minimize fees and taxes and maximize eventual net worth as a result of the windfall. – Todd Wilcox Dec 18 '17 at 18:20
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Congratulations!

Assuming that you have set aside money for taxes, etc. (granted, this is a fairly big assumption, so make sure to check it!), the first thing you will need to do is to contact your lender. Ask them to set you up to pay off your entire mortgage balance immediately and give you the exact amount and other payment details for this.

Do not make any extra payment without contacting the lender first.

If you simply pay a larger sum on your next mortgage payment, it's possible that the extra money could be booked against future interest and/or fees, which is not what you want. Talking to the lender will ensure that this does not happen, and will also ensure that you know what extra fees (if any) you will have to pay; for example, early payment penalties. You'll be able to get an itemized breakdown showing exactly how much of the money you are paying is going where.

However, absolutely do make sure that you pay any outstanding mortgage bill normally. When talking to the lender, it's perfectly reasonable to ask them to assume timely payment of the outstanding bill, or alternatively to cancel it and issue a new one for the entire balance. Either way, make sure you know what you are supposed to pay, when and how. The person you are talking to at the lender will be able to help you through the gritty details of this.

You'll then likely get a mortgage bill in the mail much like normal, except it will show a far larger principal payment in the breakdown. Simply pay that normally and ensure that whatever other mortgage paperwork is used in your particular location is handled appropriately. The lender will be able to help guide you through this; if you feel uneasy about it, or anything about the process doesn't feel right, I would recommend consulting with a financial expert or lawyer, as appropriate. Real-estate transactions shouldn't be taken lightly.

After your mortgage has been paid off, decide what to do with the rest of the money as well as the additional cash flow that previously went to mortgage (principal, interest, fees) payments. If you aren't sure where to put the money just yet, a good savings account isn't at all a bad place while you make up your mind.

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    Also remember that your lender has probably been taking money in escrow to pay property taxes and insurance on your behalf. With the loan paid off, it will become your responsibility to pay those bills. – hobbs Dec 18 '17 at 21:24
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    @hobbs I strongly suspect that would depend on locality. Note that OP doesn't say where they are located; a number of countries use "$" for money. Hence I tried to avoid assuming any particular jurisdiction. – a CVn Dec 18 '17 at 21:36
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    Is there any mortgage company that puts the money towards future payments these days? We have simply overpaid the mortgage, a total of three companies at this point. It always gets applied correctly. Just beware that there might be an early payoff penalty. – Loren Pechtel Dec 19 '17 at 4:55
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    @LorenPechtel Possibly not, but you don't want to find out the hard way that your lender is the only one that does for the sake of not saying "to be applied to principal" or "to close the mortgage". – TripeHound Dec 19 '17 at 8:03
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    Talk to the lender because you might have an overpayment fee! Many mortgages limit overpayments and will charge around 10% if overpaid. – SLC Dec 19 '17 at 11:27
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Just to be clear, I want to address this part:

The balance is $ 173,000.00 I understand that most of my monthly payments go towards interest. But what should my actual payoff amount be? I have an interest rate of 3.5%

Your monthly payments primarily go to interest (if you have a 30 year loan, and are earlyish in paying it) because your payments consist of:

  1. The accrued interest from (day of last payment) to (today's payment)
  2. The amount of principal needed to pay the loan off in 30 years, while having constant monthly payment amounts

(1) is an amount that varies over the course of the mortgage, because the amount of interest decreases as the principal decreases. A simple calculation can show an approximate amount of this - for example, if you owe $173,000 at a rate of 3.5% (annually), then for a 30 day month, you would owe ($173,000 * (0.035*(30/365)) in interest, or just about $500 in interest (plus a small amount more as you owe interest on the interest, but it's meaningless here). So you have around $500 in interest due each month right now, plus whatever principal you owe - say $300 in principal, if you have an $800 payment (before escrow, insurance, etc.)

If you have a "no prepayment penalty" mortgage, as many do nowadays in the US, then you won't owe extra for prepaying: what you'll owe is the full amount of the principal ($173,000) plus whatever interest you still owe for the current month (maybe $500) and any escrow payment. You don't automatically owe the full interest for the entire mortgage (another $300,000 give or take) that you'd owe if you paid the minimum mortgage payment each month.

Now: a few details.

As others stated, the correct thing to do is to call your mortgage provider and ask for a payoff amount, and a date with that payoff amount. That will consist of:

(A) A dollar amount that's a bit over your current principal amount (if it's more than a bit over that, you may need to talk to a financial expert to see what's going on)

(B) A date which that is valid for. Typically a few days from now.

If you pay the amount in (A) by the date of (B), you will be paid in full and owe no more on your mortgage. Though you should of course verify this afterwards (sometime between the date of your payment and the date of your next payment's due date). You should receive an official payoff letter from your mortgage lender; ask for one if you do not, though it may take a month or three (ask them how long).

Once you've paid it off and verified the zero balance (actual zero, not $0.05, as that's still implying an amount due), you have several things to check:

  • Assuming you had an escrow for property taxes, home insurance, etc., you now have to decide whether to continue having an escrow or not for those things, or just pay them yourself. I strongly encourage you to either continue an escrow, or manage your own escrow through a funded account that earns enough to pay property taxes each year. Talk to a financial planner about your options there. It's very easy to forget to pay property taxes, or to forget to budget for them, and guess what - if you forget and get behind, you'll lose the property you just paid off.
  • Depending on the state you're in, you may have additional things to do to make sure the title is clear of the lender. Make sure that the title is released to you. Again, talking to a local financial planner or real estate attorney may be helpful.

Finally, again echoing what others have said: before you do this, make sure you're otherwise good financially. You owe taxes on the winnings, probably, so make sure those are paid for. And make sure you're entirely comfortable with paying the amount you're paying for your mortgage. 3.5% isn't a bad rate, and it may be simpler to not pay it off, and instead invest the amount and pay the mortgage from the investments. This isn't for everyone, but one thing it does for you is increase your liquidity while not "changing" too much from before, which can be a significant benefit to some.

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    To echo one of the good points in this answer: I have repeatedly been contacted by my financial institution to resolve discrepancies in loan balances that were under ten cents. Modern banking software is surprisingly bad at dealing with these sorts of rounding errors. Double and triple check that the loan really is paid off because believe me, spending a half hour on the phone with customer support arguing over a dime is not a good use of anyone's time. – Eric Lippert Dec 18 '17 at 19:31
  • I finished off one of my student loans that lacked an easy way to get a final payoff amount/date (IIRC they could only do it by mailing paperwork back and forth) by sending an extra payment that reduced my balance to less than the amount of the automatic monthly payment they charged my bank account and then let their system just bill for the remainder. Theoretically it cost me a few cents extra interest, but avoided a lot of hoop jumping. – Dan Neely Dec 19 '17 at 15:58
  • It is dependent on how the lender handles extra payments, I couldn't do the same with my other loan since they credited extra against your future minimum payments. If I tried the same there, they'd've kept charging interest on the last few dollars for the last half dozenish years until my final scheduled payment was due. OTOH they did offer an online payoff calculator to let me do it directly with minimum friction. – Dan Neely Dec 19 '17 at 16:00
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I have just won a large sum of money

Since this is the PF site:

  1. Have you squirreled away enough for taxes?
  2. And retirement?
  3. What will you then do with the $706/month?
  4. Your plan for leeches, who will emotionally manipulate you into spending all your money on them, and then leave when you're broke?
  5. Ditto criminals.
  6. Don't forget the family leeches.

The balance is $ 173,000.00 ... But what should my actual payoff amount be?

If your balance is $173K, then that -- nominally -- is what your payoff will be. Call the mortgage company to get the exact dollar value.

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    +1 for leeches. A windfall will reveal you have more friends and family than you previously thought – BlackThorn Dec 18 '17 at 20:43
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Say your last statement was $173,000.

It would be this, plus interest - calculated on a daily basis (so will need to contact mortgage company), plus fees - e.g. Mortgage discharge fee and potentially ERC (early repayment charges). So you would arrange a redemption date in the future and they would calculate an exact payment figure.

Now since you've only had mortgage for 2 years, you might well have ERCs, so depending on this you might want to wait till they expire.

Also the questions posed by RonJohn are all good - make sure you put aside money for taxes and rainy day money etc. Remember -a higher percentage of lottery jackpot winners go bankrupt than regular people! (it's said, I can't find hard evidence, apart from a few famous cases)

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The payoff amount will be the loan balance, on your monthly statement, but this changes as interest is compounded. Call the bank to get the exact amount, and arrange the payoff. Also, make sure there is no prepayment penalty.

Personally though, I would not spend my own money paying off such a low-interest loan early. Talk to a financial planner about investing that money, and living off the interest, and paying off the loans with that cashflow, without depleting the principal.

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I'm currently quite involved in the home buying process, and one thing I've talked about with my adviser is paying off the house early. One thing you may not consider (I certainly didn't) is that if you end up paying much less interest, you may also not be able to write that off as a deduction from earned income, and will end up having to pay even more income tax on your regular (non lottery) income as well. I'd suggest fully calculating the check you're gonna cut uncle sam, and try out a few different options to see what nets you the most money over say a 10 year period. If you expect the estate to grow in value faster than the stock market, dump the money into the house so you can re-invest in more real estate as quickly as possible. What's more likely however is that you'd earn more on the money in an investment account, but there'll be some tipping point on how much to put towards each, so you'll have to reason it out.

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    So you would pay $5,000 in interest to the bank to save $1,400 in taxes (assuming 28%)? You would be -$3,600 instead of -$1,400. – AbraCadaver Dec 18 '17 at 18:42
  • @AbraCadaver no, but you would have to make sure come tax time that you have enough in the bank to cut the check, because you'll be missing a significant tax deductible that you may have gotten accustomed to getting. You wouldn't want to immediately dump the rest of the money into stocks then in less than a year have to sell some of them just to pay taxes that year. At the moment, (and for the foreseeable future) you make more money by putting the money in stock rather than paying off the morgage. You are basically buying stock with the morgage money at that point. – Aaron Dec 18 '17 at 18:55
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    Even if you just put it in a savings account you still come out $2,200 ahead. – AbraCadaver Dec 18 '17 at 18:57
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    Worth noting that you can only deduct mortgage interest expense if you itemize your deductions. – self.name Dec 18 '17 at 19:01
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    @self.name With a house at this price point, does itemizing generally beat out just taking the standard deduction? I asked, because a couple years ago, I went though all of my medical bills, mortgage payments (similar value), etc and itemized everything I could. I did not end up exceeding the standard deduction. – Michael Richardson Dec 18 '17 at 20:55
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Another approach to this that might save you a few $ here:

You owe $173k. Assuming you really have the money available (as others have said, beware of taxes! If you have a $173k mortgage it's very unlikely you're in a position to pay the taxes with other money) and there's no pre-payment penalty the first thing to do is to pay down a big chunk of it right away.

If you can log onto their website and schedule a $172k payment for tonight, that's your best bet. Second choice is to overnight them a cashier's check for $172k. The thing is you want to stop as much of the interest as you can as quickly as you can, then you can worry about getting exact payoff numbers when the interest isn't ticking up nearly so fast.

As for the leeches--any way to keep your friends and family from knowing you won? That sort of thing is best kept to you and your spouse. No need to tell them the mortgage is paid off, either--pretend things are normal.

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    Acting as though less than $20 per day interest is a financial emergency, plus unsolicited recommendation to lie to friends and family. Nice. – jwg Dec 20 '17 at 9:52
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    Before rushing to make a massive payment to avoid a small amount of interest, maybe check to make sure there aren't any large early repayment fees? – Tom.Bowen89 Dec 20 '17 at 14:15
  • @Tom.Bowen89 Please note my second paragraph. – Loren Pechtel Dec 20 '17 at 21:29
  • @jwg Financial emergency? I suggested it to save a few bucks. And apparently you have never been in the position of having more than your friends/relatives--leeches are a very real concern and the best defense is for them to not realize there's anything to leech. – Loren Pechtel Dec 20 '17 at 21:31
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It depends on the terms of your mortgage, but in most cases any payment to the mortgage account that is in excess of interest currently owed is applied against the principal.

So, in other words, if the current principal of your loan is $173,000 and you pay that much into the account, then the loan will be terminated.

You should probably verify this with your lender because some mortgages have penalties for early payoff. In such cases you can still pay off the loan, but you will then own the penalty as well, if there is one.

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