How the payoff works at closing
A mortgage is a lien on your house. A buyer will not take the house with your lender's lien still on it, so the lien is paid and removed as part of the sale. You do not have to pay the loan off before you list.
- Tell your attorney or closing agent who your servicer is. Use the name on your monthly statement. The company that collects your payment (the servicer) is often not the lender that made the loan.
- Request a payoff statement in writing. Give the servicer the expected closing date. Massachusetts law says the servicer must send a written payoff statement within 5 business days of a written request, and it has to show an exact amount for the date you name, or a per-day amount for later dates. The federal rule says 7 business days. The statement may be good for as little as 30 days, so order a fresh one if closing slips.
- Closing day. Your attorney wires the payoff from the buyer's funds. The seller's check comes after the payoff, the commission, the deeds excise tax and other costs are paid.
- Discharge. Once the servicer has been paid, it must record a discharge of the mortgage at the registry of deeds, or give one to your closing attorney, within 45 days. If the servicer misses that deadline, the law lets you recover damages, so your attorney should track it.
The rules above are in MGL c.183 s.54D (payoff statements), MGL c.183 s.55 (discharges) and the CFPB payoff rule. Under c.183 s.54C, once a proper discharge is recorded, the lien on your house is released.
Per-day interest: why the payoff is more than your balance
The payoff is not the number on your last statement. It is the unpaid principal, plus interest that has built up since your last payment, plus any fees or escrow items the loan allows. Mortgage interest is paid after it accrues, so on closing day you owe interest for the days since your last payment. The payoff statement can show this as a per diem, which is just the interest for one day.
Example (our arithmetic, not a quote): a $400,000 balance at 6.5% costs $400,000 x 0.065 / 365 = about $71 per day. If closing moves 10 days past the payoff date on the statement, the payoff goes up by about $710.
Ask for the payoff to be good through a date a few days after your planned closing. That way a small delay does not stop the closing.
What you actually keep: equity is price minus payoff minus costs
Equity on paper is your sale price minus your loan balance. What you keep is smaller, because selling has costs. A simple example for a house in a town like Melrose, Medford or Saugus:
| Line | Amount |
|---|---|
| Sale price | $650,000 |
| Mortgage payoff | -$412,350 |
| Agent fees (example 5%) | -$32,500 |
| Deeds excise tax ($4.56 per $1,000) | -$2,964 |
| Attorney (example) | -$2,000 |
| Other closing costs (example) | -$1,000 |
| Estimated cash to you, before income tax | $199,186 |
Agent fees, attorney fees and other costs are negotiable and vary, so the lines marked example are placeholders. Run your own numbers in the net proceeds calculator, and see closing costs for sellers for the full list. Income tax on any gain is separate; see the capital gains calculator.
Prepayment penalties and other payoff surprises
The CFPB says a prepayment penalty typically applies only if you pay off the whole loan, for example by selling, within a set number of years (usually three or five). Not every loan has one. It must have been disclosed when you took the loan, sometimes only in an addendum to the note, so read the note and anything titled "Addendum". Massachusetts' high-cost home loan law, which covers a narrow class of expensive loans, bars prepayment fees on those loans, per Mass.gov.
Other items that can change the payoff: unpaid late fees, an escrow shortage, or a servicer's payoff fee. Compare the payoff statement to your latest statement and ask the servicer to explain any line you do not understand.
FHA and VA loans: can the buyer take over your loan?
Some loans can be assumed, which means the buyer takes over your loan and its interest rate. It is uncommon, and it is not a way to skip the lender.
FHA: FHA-insured mortgages are assumable, but HUD's notice to homeowners says the buyer's credit must be approved. Even then you stay liable for the debt unless the lender gives you a release (form HUD-92210.1). Ask for it in writing.
VA: VA's buyer's guide says VA loans are assumable, that the servicer (and sometimes VA) must approve, and that a funding fee of 0.5% applies. If the buyer defaults, it can count against the original veteran's entitlement, so ask for a release of liability.
Many conventional loans have a due-on-sale clause, which lets the lender demand full payment when you sell. Check your note, and get the lender's written consent before anyone tries to take over a loan.
If you owe more than the house will sell for
If the payoff plus selling costs is more than the sale price, you are "underwater" and the sale will not pay off the loan in full. You have a few choices:
- Bring cash to closing for the gap, if you have it.
- Ask your lender to approve a short sale, where it accepts less than the full balance. Get any waiver of the remaining debt in writing.
- Wait or rent the house out. The sell or rent calculator compares the two.
- If you are behind on payments, talk to a HUD-approved housing counselor or call the HOPE Hotline at 888-995-4673. See behind on mortgage payments.
This guide is general information, not legal or tax advice. Your closing attorney reviews the payoff statement and the discharge, and your CPA can answer tax questions.
Second mortgages and liens on the same house
If you also have a home equity loan or line of credit, it gets its own payoff and its own discharge. See home equity loan and HELOC payoff at sale. Judgments, tax liens and other claims are covered in liens and judgments when selling. If the loan is a reverse mortgage, the rules differ; see reverse mortgage and selling.