How it works
- You accept an offer. The sale price is set in the contract.
- The closing agent orders a payoff statement from your mortgage servicer.
- At closing, the buyer's money pays the lien first. The closing agent sends your servicer the payoff amount, then pays commissions and other costs.
- You get the rest. The lender releases its lien, so the buyer gets clear title.
The payoff statement
Your payoff amount isn't the balance on your monthly statement. It's what you actually have to pay to satisfy the loan, including interest that has built up since your last payment and any unpaid fees. Payoff statements are good through a specific date.
If you ask in writing how much it costs to pay off your mortgage, the servicer generally has seven business days to answer, and it can't charge you a fee for responding to a written request. If you think the payoff figure is wrong, send a written notice of error. After payoff, any escrow balance is refunded; if it isn't refunded within 20 days, send a written notice of error.
What you walk away with
Example: you sell for $400,000. Payoff $230,000. Commission $22,000, transfer tax and title/escrow fees $5,000, and a $5,000 credit to the buyer for repairs.
The fee amounts are examples; they vary by state and contract. Estimate yours with the home sale calculator and check your payoff with the mortgage payoff calculator. For a full list of selling costs, see how much it costs to sell a house.
If you owe more than the house is worth
If the sale won't cover the payoff and costs, you're "underwater". Your options:
- Bring cash to closing to cover the gap.
- Short sale: your lender agrees to let you sell for less than you owe. It's a form of loss mitigation and an alternative to foreclosure, but you still leave the home. In some states the lender can sue for the deficiency (the shortfall) afterward, so ask the lender to waive it and get the waiver in writing.
- Wait and keep paying, if you can, while the balance falls and the value may rise.
The CFPB suggests talking to a HUD-approved housing counselor before a short sale, and a tax professional about any forgiven debt.
Prepayment penalties
A prepayment penalty is a fee some lenders charge if you pay off all or part of your mortgage early. You would have agreed to it at closing, and it usually applies only for a set period, often three or five years, and typically only when you pay off the whole balance, such as by selling or refinancing. Check your loan documents or ask your servicer before you list the home. Your periodic statement must show any prepayment penalty.
Buying your next home
If you're buying again, your net proceeds become your next down payment. Model it with the down payment calculator and the home affordability calculator.
Sources: CFPB: your mortgage servicer must comply with federal rules; CFPB: key mortgage terms (payoff); CFPB: what is a short sale?; CFPB: what is a prepayment penalty?.
Every worked example on this page was checked with Calcist's own engine and an independent reference.