Question: My wife and I are planning to pay off our home mortgage. Do we need a lawyer for this? If we do not need an attorney, then what should we do? Should we just call up the mortgage company, tell them our intentions and just work it out with them. What should we be looking out for?
Friends tell us that this is as easy as paying off your car loan, and just make sure that we get our house title, just like we get the title to our car. Is it really that simple?
Answer: I am not sure that I can equate paying off your home mortgage to paying off your car loan but yes, it is a relatively simple process.
First, however, you should ask yourself why you want to pay off that mortgage? It is obviously nice to own your own home, "free and clear" of any debt. But is this really in your best interests?
Over the years, I have encountered many people who did not owe any money on their house, but did not have sufficient funds for the upkeep of the house -- such as insurance, real estate taxes and routine maintenance. They were, in effect, "house rich and cash poor".
No one obviously likes to pay a lot of money for interest to a bank. But have you "done the numbers" to determine if the tax benefits you get by deducting the mortgage interest offsets to some degree these mortgage payments. Do you have other investment opportunities where these funds can go, instead of paying off your mortgage.
Keep in mind that in some areas your house will probably appreciate an average of 3 to 5 percent per year, regardless of whether you have a mortgage or not. Thus, the equity in your house (the difference between the market value of the house less any outstanding debt) is what I call "dead equity". Ask yourself whether you are better off keeping your mortgage on the books, making the monthly payments, deducting the mortgage interest, and using the funds for some other purpose.
However, if you decide to pay off your mortgage debt, here is what you have to do:
- Each jurisdiction has somewhat different procedures, requirements and costs for releasing deeds of trusts from the land records. Usually, the staff of the local Recorder of Deeds in the county (or city) where your property is located will be helpful. Alternatively, you can ask your attorney to complete the release transaction. Be certain you fully understand all requirements and, also, potential costs in the event of error.
- Obtain a statement from your lender as to how much will be needed to pay off your loan in full. Get that statement in writing.
- Make arrangements to pay off the lender in the full amount that is shown on the pay-off statement. Keep in mind that interest accrues on a daily basis. Your lender will not release your mortgage unless they are paid in full to the penny. If you are dealing with a legitimate, commercial lender, it sometimes makes sense to pay the lender a few days more interest, just to make sure that your payment will be properly credited. For example, if you calculate interest up to the 29th of November, and somehow your check is delayed in the mails and does not reach the lender until December lst, you will owe two days additional interest. The legitimate lender will refund any excess payment you have made.
- If the lender has been escrowing for real estate taxes and interest, make sure you understand how the lender will treat those funds.
Some lenders will credit the amount in escrow so as to reduce your outstanding balance. Other lenders will send you a refund check two or three weeks after receiving your final mortgage payment.
- Your mortgage (usually referred to as a "deed of trust") was recorded among the land records where your property is located. Once the loan has been paid off, that mortgage must be released from the land records. Some lenders will assist you in preparing a release which meets the legal requirements in the jurisdiction where your mortgage was recorded; other lenders will not. Inquire of your lender as to their practice.
- Regardless of whether your lender will assist you in preparing the release, you must get back from your lender the original promissory note you signed, which the lender will mark (somewhere on the face of the note) as "paid and cancelled". Some lenders have a stamp which contains these words; others will merely hand-write these words across the front of the note.
The actual words are not important, so long as it is clear that your note has been paid off. You should also get back the original Deed of Trust.
In this connection, if you are dealing with a commercial, recognized mortgage lender, they will routinely return the paid original promissory note and deed of trust once they have received your final payment. It sometimes takes a couple of months to get these documents back.
However, if your mortgage was held by a private individual (for example your seller took back financing), you should make arrangements to exchange your final check for the original note and trust. There have been too many instances where the private lender either has lost the legal documents, or forgets to send those documents back to the borrower after receiving payment in full.
You should understand that when you ever go to sell your property -- or try to refinance -- that old mortgage must have been released from land records. If it was not, you will have to obtain a "lost note bond" which can be expensive, or you will have to start scrambling around to find your original lender and your original documents.