If you are selling a property and have mortgage(s) and/or home equity line(s) of credit (“HELOCs”) on said property, you will need to provide your attorney with a payoff letter from your mortgage lender(s) for each loan or lien of credit. Your attorney will then provide it to the title company.
What is a Payoff Letter?
A payoff letter (also referred to as a “payoff statement”) is a document that provides detailed instructions on how to pay off a loan. Payoff letters help you avoid surprises by providing all the information you need in one place and allow the title company to make sure the lien is paid in full.
It can be challenging to predict exactly how much you need to pay. Interest charges get added to your loan balance every day (or every month), so the amount you owe changes constantly. If you were to try to pay off the loan using the loan balance shown on your last statement, there is a strong chance that your payment will fall short of the amount actually owed.
When that happens, the lien is not extinguished. It continues to accrue interest and late fees (that you did not even realize you were accruing as you thought the loan was paid off at closing), and you will need to make phone calls, send additional payments, and wait longer than you expected to eliminate your debt. The lender will also not record a release of the loan/lien, which can cause potential legal problems for you and adversely affect your credit.
Payoff letters generally supply the following information:
- The amount of the full payoff as of a certain date
- A “per diem” interest amount if paying before or after projected payoff date
- The date the payoff amount expires
- Wire instructions/where to send the money/who to make the payment payable to
- Additional charges to include with your payment (generation fees, outstanding penalties, prepayment penalties, account closing fees, or fees to record a release, for example)
How Do I Get My Payoff Letter?
To get a payoff letter, ask your mortgage lender for an official payoff statement and let them know what the projected closing date is. If requesting it online, while logged into your account, look for options to request or calculate a payoff amount, and provide details such as your desired payoff date. If you cannot locate an option to this on the lender’s website, call customer service for assistance. You can find this number on your mortgage or HELOC monthly statement.
If your lender will only fax or mail the payoff letter, when given a choice, always choose the fax option. Mail can be slow and unreliable. For reference, Byrne Law’s fax number is (312) 957-6178.
You will want to do this as early on in the transaction as possible, as some lenders are faster than others with producing payoff statements, with times ranging from immediately (for PDF downloads) to several weeks if the lender will only mail it.
What If There is a Waiting Period?
Many lenders will not generate a payoff letter until thirty (30) days before closing. In that instance, please let us know. We would be happy to create a calendar invite to remind you.
What If the Closing Occurs Before or After the Projected Closing Date?
Some long as the closing occurs within thirty (30) days of the payoff date, it is usually fine. The payoff letter will still provide a per diem amount, so if the closing happens a little later than expected (small delays are not uncommon in residential real estate transactions), the title company can calculate and include the additional interest amount.
Are There Fees?
While most payoff letters are free-of-charge, some lenders charge specific fees when you pay off a loan early. They may include:
- Generation fees. Expect to pay a modest fee for a payoff letter, but as previously noted, the service is usually free. The cost might depend on how you get the letter—ask customer service for details. For example, some lenders provide a PDF or mail the document for free but charge a fee to email or fax it to you.
- Processing fees. You might also have to pay processing fees to pay off your loan. This is a charge from your lender for handling the payment and closing out the loan account.
- Prepayment penalties. Although relatively rare, prepayment charges still exist on some loans.
- Release fees. Your lender may charge a fee for recording your release. This is typically a passthrough charge from the county recorder where the release is being filed.
Can I Close Without a Payoff Letter?
No, not typically. You will find articles on the internet about alternatives to payoff letters. In Illinois, most tile companies will not accept anything other than an official payoff letter. While you can request verbal payoff quotes from your lender, it is not an official and legally binding document. If your lender gives you bad information, you will not have any recourse.
What is a Release?
A release is a document that is recorded by either your lender (typical) or the title company (rare) after you’ve successfully paid off a loan. This document demonstrates that the debt has been satisfied and it might help if you need to prove the loan no longer exists down the road.
A release can also come in handy if you’ve got errors in your credit report. If a credit bureau is incorrectly reporting a loan as open that you’ve paid off, they’ll need documentation to remove that error. A recorded release from the lender helps you get errors removed.
Do I Need a Payoff Letter If I am Refinancing?
Typically, you only need to request a payoff letter if you’re paying off the debt completely (i.e., selling your home). If you are refinancing your debt, your new lender or a title company will most likely make the payoff letter request on your behalf.