If you pulled your own credit report today and looked at your mortgage account, you’ll notice there is a balance, your monthly payment and your payment history. But sometimes borrowers get a surprise when they buy a new property and retire the old VA mortgage or refinance a VA loan. The loan balance doesn’t match what appeared on your credit report. Why are you paying more than what you thought you owed? It’s due to the VA mortgage payoff amount.
VA Interest Accrual
To understand a VA mortgage payoff, it’s important to understand how lenders apply your payment each month. When you make a payment each month, you’re actually paying for the month you’ve already lived in, not the month coming up. It’s just the opposite how rent works. When you make a rent payment, you’re paying upfront to live in the home.
With a mortgage, interest accrues daily. Your mortgage payment includes an amount that goes directly to pay down the mortgage balance and interest due the lender for the number of days you owned the property in the previous month.
If you recall, and if you can’t you can pull out your old settlement statement, when you first purchased the home you paid an amount called prepaid interest. This is a per diem accrual of interest owed to the new lender. In effect, your new VA lender is collecting the interest upfront and you’re making your first mortgage payment to the lender at the closing table.
Say that you closed on the property on the 25th of the month and there are 30 days in the month you closed. The lender will collect daily interest from the 25th to the 30th. If you closed on the very last day of the month, you would pay just one day’s worth of interest to the lender. On the first day of the following month, there is no mortgage payment due because you already made your first month’s payment at the closing table based upon the number of days you will own the property.
The VA Payoff
Now let’s go back to the credit report you pulled. The mortgage balance includes the principal amount only and the outstanding balance is $200,000. Now say that you’re closing a refinance on the 25th of the month. Your new VA lender will order a payoff amount from your soon-to-be old VA lender. Your old VA lender hasn’t been paid for the 25 days you’ve owned the property. Say that your per diem interest is $20 per day. The old lender will want 25 days of daily interest, or 25 X $20 = $500.
Your VA payoff is then $200,500. That’s why your payoff is higher than the outstanding balance. You’ve yet to pay the interest due.
And since you’re refinancing, you will have interest in arrears to be collected, in this example $500 as well as prepaid interest to the new lender, again in this example five days of interest.
When you’re buying a property and selling the one you’re currently in, you will again have interest due the old lender and prepaid interest to the new home when using your VA entitlement to buy and finance a home.
The VA Refinance Payoff
Finally, is there a strategy you can employ when considering your payoff amount? Many think that it’s not that big of a deal, interest is interest after all. But if you’re refinancing your VA mortgage in order to lower your rate and reduce the amount of interest you pay your lender, the sooner you refinance out of your old loan, the sooner you can begin saving on interest.
When you purchase a home, most closing occur toward the end of the month which saves the buyer some cash at the closing table due to the few days of prepaid interest needed. But when you refinance, it’s you that can set the closing date along with your VA lender. If you set a closing date on the fifth of the month, your payoff will include the outstanding balance plus just five days of interest at the higher rate and 25 days of the new, lower one.