Paying Off Your Mortgage


Considering paying off your mortgage? First, ask yourself: do you really want to pay off your mortgage. Do you have other uses for the money? Do you want to give up the tax deductions that you get for the interest payments? Interest rates on mortgage loans are so incredibly low right now, that it almost pays to get a refinance loan.

Keep in mind that under current tax law, once your mortgage is paid in full, your "acquisition indebtedness" is zero. This means that your mortgage interest deductions will be limited to an amount not to exceed $100,000 -- which would include a second trust or a home equity loan. If you should ever decide to refinance your property at a later date, you will not be able to deduct any interest payments associated with that new loan which exceeds this $100,000 cap.

If you still wish to pay off that mortgage, write your lender asking for a payoff statement. When received, review it carefully. If you have any questions about the outstanding balance, ask your lender to send you a complete payment history from the time you first obtained the loan. You may find extra costs being charged your loan -- such as late fees. These may or may not be correct. Before you pay the loan off, you have the right to question all of those charges.

When you pay a mortgage (deed of trust) on a monthly basis, you are always paying interest in arrears. Thus, the June 1st payment you made brings you current through May 31st. If you were to pay off your loan on June 28th -- for example -- in addition to the principal amount of the loan, the lender will also charge you 28 days of interest. Remember that the lender is entitled to interest to the day they receive your payment -- not just to the day you mail your check. Most lenders will advise you what the "per diem" interest rate is.

Thus, if you mail the check on the 28th day of June, add a few days of the per diem interest, just to be on the safe side. All legitimate lenders will send you a refund of any excess payments they may have received.

You should also carefully review any escrows which the lender may be holding. If your lender has been escrowing money for payment of your real estate taxes and insurance premium, the lender may be holding excess funds, which really belong to you. Again, you are entitled to receive an itemized breakdown of how the lender has handled these escrowed funds.

Don’t forget to cancel any automatic mortgage payments you have arranged with your bank. You would be surprised at how many people forget that their bank has been instructed to make monthly mortgage payments directly from your bank account, and the bank will continue to make these payments until they receive instructions to the contrary.

When you first obtained a mortgage loan, you signed two separate legal documents: a promissory note and a deed of trust. Once the lender has received your final payment, both of these documents should be returned to you, and the lender should mark them "paid and canceled." The canceled note is proof that you have paid the mortgage in full. The deed of trust was recorded among the land records where your property is located. Now that the note has been paid, you must have the trust released from those land records.

Typically, most lenders will not take care of recording the release. They will send you a letter, congratulating you on paying off your mortgage, and will send you the original note and trust which they have marked as paid. It is your obligation to make sure that you release that mortgage from land records.

First, if the lender was a private individual rather than a commercial lending institution, I do not recommend that you merely send the payoff check to that person. Instead, make arrangements to exchange your check for the paid and canceled promissory note. Otherwise, it may take you months -- if not years -- to retrieve the note and you may have problems releasing the trust from the land records. Indeed, I have encountered numerous situations where the lender lost the original promissory note; this can cause serious delay in selling your property since the old trust cannot be released.

Second, when you pay your lender the additional interest on the note, make sure that you properly deduct this amount on your income taxes. Although most lenders send you an annual statement of the interest you have paid on the note, the computers for many lenders are not geared up to include the final payment of interest. Thus, too many taxpayers may be losing a valuable tax deduction.

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