The payoff statement a note holder sends when the borrower sells or refinances, built line by line, with the day-count and the good-through date.
A payoff amount is the unpaid principal balance after the last payment, plus per diem interest from the paid-through date to the payoff date, plus any fees the note and local law allow. On an illustrative note with a $122,692.38 balance at 7.25 per cent, interest runs at $24.37 a day, 17 days add $414.30, and the borrower pays off on 18 April for $123,161.68.
Worked in full in The Mortgage Note Investor by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every performing note eventually ends in a payoff: the borrower sells the house or refinances, and the title company asks the note holder for a payoff statement. For a note investor the statement is not paperwork; it is the moment the discount paid for the note is realised, and an error on it is either money given away or a dispute with a closing agent. The arithmetic is simple, but three conventions decide it: interest in arrears, the day-count basis and the good-through date.
| Item | Value |
|---|---|
| Original balance | $130,000.00 |
| Note rate, fixed | 7.25% |
| Term (months) | 360 |
| Monthly principal and interest | $886.83 |
| Instalments received, the last one due 1 April | 60 |
| Interest basis in the note | Actual/365 |
| Requested payoff date | 18 April |
| Recording fee for the release / payoff statement fee | $30.00 / $25.00 |
| Escrow balance held for taxes and insurance | $1,240.00 |
Run the amortisation schedule to the last instalment received. After 60 payments of $886.83 on a $130,000.00 loan at 7.25 per cent, the balance is $122,692.38. Take it from the servicing ledger, not from a calculator, if the borrower has ever paid extra principal or paid late; the ledger is what the release will rely on.
Per diem = unpaid balance × note rate / days in the year
$122,692.38 × 7.25% / 365 = $24.3704, or $24.37 a day. In Excel: =B2*B3/365, left unrounded.
Accrued interest = per diem × days from the paid-through date to the payoff date
$24.3704 × 17 = $414.30. In Excel: =ROUND(B2*B3/365*17,2).
Mortgage interest is paid in arrears. The instalment due 1 April paid the interest for March, so on 1 April the loan is paid through 31 March and April's interest starts accruing on the new balance. From 1 April to 18 April is 17 days. Keep the unrounded per diem for the multiplication and round the total, or say on the statement that you did not.
| Line | Amount |
|---|---|
| Unpaid principal balance | $122,692.38 |
| Interest, 1 April to 18 April, 17 days at $24.37 | $414.30 |
| Recording fee for the release | $30.00 |
| Payoff statement fee, where permitted | $25.00 |
| Unpaid late charges | $0.00 |
| Total to pay off on 18 April | $123,161.68 |
The $1,240.00 escrow balance is not netted against the payoff on most servicing platforms; it is refunded to the borrower once the funds clear. The borrower's net cost is therefore $121,921.68, but the closing agent must wire the full $123,161.68. Whether a statement fee can be charged at all depends on the note and the state; where it cannot, leave the line out rather than argue it at closing.
Closings slip. A statement quotes the per diem so the closing agent can add days: ten more days add $243.70, giving $123,405.38 good through 28 April. If the wire arrives earlier than the date used, the excess is refunded; if it arrives later than the good-through date, the agent must request an updated statement.
| Days of April | Accrued interest | Payoff |
|---|---|---|
| 1 | $24.37 | $122,771.75 |
| 10 | $243.70 | $122,991.08 |
| 17 | $414.30 | $123,161.68 |
| 24 | $584.89 | $123,332.27 |
| 30 | $731.11 | $123,478.49 |
Once the funds arrive, the note holder's job is not quite finished. Check the wire against the statement, apply any excess or shortfall from a late closing at the per diem, refund the escrow balance, and sign and record the release or satisfaction of the mortgage within the period local law requires. A payoff left unreleased is a title problem for the borrower and, in many places, a penalty for the lender.
Balance after the last instalment, plus the per diem for the days since the paid-through date, plus permitted fees: $123,161.68 here. For the note holder the payoff is also the end of the investment, and its date changes the yield more than any line on the statement; that effect is worked in how an early payoff changes a note yield. The Mortgage Note Investor prices a performing owner-financed note with a balloon and tests what prepayment does to it, and the free workbooks for the book's cases carry the amortisation and payoff months as live inputs.
Multiply the unpaid principal balance by the note rate and divide by the days in the year the note specifies, usually 365. On $122,692.38 at 7.25 per cent that is $24.37 a day. On a 360-day basis it is $24.71, which over 17 days adds $5.75. The note, not the servicer's habit, decides which basis applies.
Because mortgage interest is paid in arrears. The instalment due 1 April paid March's interest, so interest for the days of April up to the payoff date is still owed. In the example 17 days at $24.37 add $414.30, and $55.00 of recording and statement fees bring the payoff to $123,161.68, $469.30 above the balance.
It is the last date on which the quoted figure settles the loan. Statements quote a cushion and the per diem so that a closing that slips is still covered. Adding ten days to the 18 April payoff adds $243.70 and gives $123,405.38 good through 28 April; any excess received is refunded to the borrower.
This article is one calculation from The Mortgage Note Investor. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.