When a note is paid off, you confirm the final amount with a payoff statement, make sure the money has cleared, and then release your lien: a satisfaction of mortgage for a mortgage, a deed of reconveyance for a deed of trust, or a deed to the buyer for a land contract. You also return the original note marked paid and close out your records for tax time.
The end of a note gets less attention than the start, but it has its own steps, and skipping them can leave a cloud on the borrower’s title or a gap in your records. Here is the order to do them in.
Step 1: The payoff statement
A payoff statement, sometimes called a payoff quote or payoff letter, is your written figure for the amount needed to pay the note in full on a given date. The borrower, or more often the title or escrow company closing a sale or a refinance, asks you for it. It should show:
- The unpaid principal balance.
- Interest from the date of the last payment to the payoff date.
- A per diem, the daily interest amount, so the figure can be adjusted if the payoff arrives later.
- Any charges your note allows, such as unpaid late fees or a prepayment charge.
- A good-through date, and where and how to send the money.
Illustrative example. Round numbers.
The principal left is $38,412.50 at 6%, and the borrower last paid through October 1. Payoff is set for October 20. The per diem is $38,412.50 times 6%, divided by 365: about $6.31. Nineteen days of interest comes to about $119.97, so the payoff is about $38,532.47, plus any allowed fees. If the money arrives on October 23 instead, add three more days, about $18.94.
Some notes count interest on a 360-day year or by whole months. Use the method your note states. If a servicing company collects your payments, it prepares the payoff statement for you.
Step 2: Confirm the money has cleared
Do not sign anything that releases your lien until the payoff is in your account and final. For a wire, confirm it with your bank. For a check, wait until it has cleared, not just been deposited. If the amount is short, tell the payer or closing agent in writing straight away and hold the release until the difference is paid.
Be wary of last-minute changes to wire instructions. Fraud aimed at real estate closings often works by sending false instructions. Send yours through a channel you trust and confirm them by phone with the closing agent.
Step 3: Release the lien
The lien is your recorded claim on the property. Until it is released, the county records still show the property as security for your note, and the owner cannot sell or refinance cleanly. The document depends on the instrument behind your note.
| Instrument | Release document | Who signs |
|---|---|---|
| Mortgage | Satisfaction of mortgage, also called a release of mortgage | You, as the mortgagee, usually before a notary |
| Deed of trust | Deed of reconveyance | The trustee named in the deed of trust, after you send a request for full reconveyance |
| Land contract | A deed transferring title to the buyer, as the contract specifies | You, as the seller who kept title |
The release is then recorded with the county recorder where the property sits, the same office where your mortgage or deed of trust was recorded. The title company handling a sale or refinance often prepares and records it for you. If the payoff happened outside a closing, you may need to prepare and record it yourself or ask an attorney or title company to do it. What recording a mortgage means explains why the public record matters.
Many states set a deadline for releasing a lien after payoff, and some impose penalties on a lender who misses it. The deadlines differ, so check your state’s rule, or ask the title company, as soon as the money has cleared.
Step 4: Return the original note
Mark the original note “paid in full,” sign and date it, and give it to the borrower or the closing agent. Keep a copy for your records. If the original has been lost, the borrower or title company may ask for a lost note affidavit; see what to do if you lost the original note.
Step 5: Tidy up the loose ends
- Insurance. If you were named as mortgagee or loss payee on the borrower’s property insurance, let the insurer know your interest has ended.
- Escrow balances. If you held money for property taxes or insurance, refund what is left to the borrower.
- Servicing. If a servicing company collected for you, have it close the loan and send the final statements. See what a note servicing company does.
- Records. Keep the payment history, the payoff statement, the release and proof of recording. Buyers, auditors and heirs ask for them years later.
Step 6: Tax reporting for the final year
The interest received in the year of payoff, including the interest inside the payoff amount, is reported like the interest in any other year. If you have been reporting the gain from the original property sale as an installment sale on Form 6252, the payoff usually brings the remaining deferred gain into the year you are paid. A prepayment charge, if you collected one, may need to be reported too. These are general points, and how they apply depends on your situation, so take your payoff paperwork to your tax adviser. For more, see taxes when you sell a note.
Special cases
A discounted payoff
If you agreed to take less than the full balance to end the note early, put the agreed figure in writing before the money arrives, state that it settles the note in full, and release the lien only once it is paid. See whether to accept an early payoff at a discount.
A payoff during a partial
If you sold a partial and the borrower pays off before the sold payments are done, the payoff is divided between you and the partial buyer under your agreement, and the buyer usually signs or authorizes the release. See what happens if the payer pays off early during a partial.
A payoff from the borrower’s sale
When the payoff comes from the borrower selling the property, the closing agent handles most of these steps. The holder’s side of that event is covered in my borrower wants to sell the property.
Related questions
How long do I have to release the lien after payoff?
Many states set a deadline and some impose penalties for missing it. The period differs by state, so check your state's rule or ask the title company as soon as the payoff has cleared.
Who signs a deed of reconveyance?
The trustee named in the deed of trust signs it, after you as the beneficiary send a request for full reconveyance confirming the note is paid.
What do I do with the original note?
Mark it paid in full, sign and date it, give it to the borrower or the closing agent, and keep a copy for your records.
Is there tax to report when a note is paid off?
The interest in the final year is reported as usual, and if you report the original sale as an installment sale on Form 6252, the payoff usually brings the remaining gain into that year. Ask your tax adviser how it applies to you.