Beneficiary Demands for Paying off a Mortgage Loan

Mortgage Burning Parties Created Title Nightmares

Beneficiary Demand
A title company can order a beneficiary demand payoff. © Big Stock Photo

Beneficiary demands are not familiar documents to most home owners, regardless of how long they have owned a home, and following is why. In the olden days, before air pollution became a concern, home owners used to burn trash and garbage in their back yards. My parents had a big black trash barrel with a heavy metal lid, and we set it on fire once a week or so. I used to roast wieners over my trash can fires as a kid.

It was also common practice back in those days to hold mortgage burning parties. The newly freed-from-mortgage home owners would invite all their friends over to the house to eat, drink, be merry and watch them burn the mortgage over a glowing trash can fire.

The main problem created by mortgage burning parties was home owners would often send their reconveyance deed up in smoke as well. Tossing the reconveyance deed into the flames meant there was no evidence in the public records that their mortgage had been paid off because the important documents were destroyed. You can imagine the number of title policy problems caused by mortgage burning parties.

 

Why is a Beneficiary Demand a Foreign Term?

Today's generation of home owners might find it difficult to picture owning a home free and clear of debt. That's because the accepted practice among a vast majority of 21st Century home owners is to refinance their loans every time mortgage interest rates drop, even as little as a quarter point decrease in rate.

The drawback to doing a refinance -- apart from paying additional lender fees out-of-pocket or rolling those fees into the loan balance -- is unless you choose a shortened amortization period, you are extending the term of your loan. If you refinance a home after five years, you have added five years to your mortgage term.

Instead of paying on a mortgage for another 25 years at that point, your loan term is now 30 or 40 years, depending on the amortization selected. Some lenders make 50-year loans.

It wasn't always this way. When I was a kid in the 1950s, people used to save money in a cookie jar, maybe slip it under the mattress or go down to the bank and deposit it into a passbook savings account. When they saved enough, they ordered a beneficiary demand from the lender and paid off the mortgage.

Today, most home owners see a beneficiary demand when they sell the house and use the proceeds of sale to payoff their mortgage. It's a fleeting moment because after the home is sold, they buy a bigger, more expensive home with a larger mortgage. For some, the cycle never ends.

 

What is a Beneficiary Demand?

A beneficiary demand is an estoppel letter from the financial institution that holds your promissory note and mortgage. It explains exactly what is required to release the borrower from debt and sets forth the following information:

 

  • Name of the lending institution.
  • Address and phone number of the lending institution.
  • Account number of the existing loan.
  • Name of the borrower(s).
  • Date of beneficiary demand.
  • Current principal balance.
  • Interest rate.
  • Date to which the interest is paid.
  • Release fee.
  • Statement fee.
  • Recording fee.
  • Delivery or FAX fee.
  • Daily interest amount.
  • Date to which the demand is valid, generally 30 days.
  • Late fees, if any.
  • Other charges, if any.

If the lender does not receive its payoff funds within the time period specified in the beneficiary demand, the beneficiary demand expires, and a new beneficiary demand must be ordered. Also, lenders generally expect interest to be paid up to the date it receives the funds, so most payoffs are padded a bit, with the overage returned to the borrower after payoff.

 

How is a Beneficiary Statement Different from a Beneficiary Demand?

A beneficiary statement is simply a letter addressing the status of the loan. Borrowers who are obtaining a home equity loan or a second mortgage are often required to submit a beneficiary statement from the first mortgage holder to ascertain the condition of the loan.

Some lenders will accept a copy of the borrower's last loan statement because they contain identical information.

A beneficiary statement lays out the following:

 

  • Name of the lending institution.
  • Address and phone number of the lending institution.
  • Account number of the existing loan.
  • Name of the borrower(s).
  • Date of beneficiary statement.
  • Current principal balance.
  • Interest rate.
  • Date to which the interest is paid.
  • Statement preparation fee.

An escrow officer told me that lenders get so few requests for a beneficiary statement nowadays, many don't know how to prepare a beneficiary statement. Some lenders send out beneficiary demands when escrow requests a beneficiary statement and don't seem to know the difference between a beneficiary demand and a beneficiary statement.

But at least you do.

At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.