You’re a day or a couple of days away from closing on the sale of your home. Everything is in order. The title company has all of the numbers organized on the settlement statement, sometimes called the HUD or the ALTA. Seller credits and charges, Buyer charges and credits.
Now behind the scenes, leading up to the closing, the title company has coordinated a multitude of moving parts, people, and financials to get this train pulled into the station. One of those items is arranging for your existing mortgage to get paid off at the right time for the right amount, and you never have to worry about it.
You’re pretty smart, and you pay attention, and you know your mortgage balance to the dollar and cent, you’ve been getting a monthly statement for years now. And it was but a distant vision back in the day… when that balance would be retired. Zeroed out.
But wait, this line item on the settlement statement is several hundred dollars more than my most recent statement shows my balance to be. What gives?
Answer: Mortgage interest is computed daily, and you make payments in arrears (after). In other words, the payment you made promptly on June 1 was actually for principal and interest of May. So if you close on June 15, you still have those days, and that interest to pay. It’s sort of like the flip side of when you bought your home, and didn’t have to make a payment for an entire month or more.
In short, the running balance and the payoff amount are not the same due to daily interest, which you pay in arrears (not in advance).