Mortgage Balance vs Payoff: What’s the Difference?
Calculating equity can be tricky, especially with a shifting market. It usually starts with the presumed fair market value minus the presumed mortgage balance. And, that’s a good start — but there can be what I call “equity eaters” that require more digging.
A commonly overlooked equity eater is what’s known as deferred principal balance.
Deferred principal balances primarily arose out of loan modifications during both the 2008 market crash and forbearances during the pandemic, but they can also exist at any time due to an accumulation of delinquent mortgage payments as a result of financial strain. Deferred balances can be tens of thousands of dollars, so equity can be significantly impacted — if not eroded completely.
Keep in mind: The actual payoff balance is a different figure than the mortgage balance, so these deferments often do not show up on a mortgage statement. That’s why a payoff should be ordered; it will show the exact to-the-penny amount that’s owed.
Prior to dividing equity or determining whether or not you’re willing to stay on a case contingent on your fees being paid out of the house’s equity, you should ask the following three questions:
- Have you ever been late on your mortgage payment?
- Have you ever done a loan modification?
- Have you ever done a forbearance?
While it’s always more accurate to work off a mortgage payoff, it would be best practice to have your client order a payoff if they answer “yes” to any of these questions.
To accurately figure out equity, you’ll also need a reliable property value as well as a full title report to uncover any liens, judgments, or encumbrances that also impact the net. Should you have any cases where you need any of these, please reach out anytime — most of this information is at my fingertips!
And for this month’s trivia question (in honor of Women’s History Month):
According to NAR, 19% of today’s single homebuyers are women, compared with just 9% of single men. Which state has the highest share of homes owned by single women?
Send me a private message with the correct answer and I’ll buy you a cup of coffee!
