When you are at the closing of a real estate transaction you may hear the term “prepaid interest.” Here is what it means…
Prepaid interest charges are charges due at closing for any daily interest that accrues on your loan between the date you close on your mortgage loan and the period covered by your first monthly mortgage payment.
For example, if you close on a home in the middle of a month, you become the owner of the home as of the closing date and will be pre-charged for the mortgage interest that is due until the last day of the month.
Lenders don’t bill you for the interest due. Instead, they include it in your closing costs.
If you were closing on the last day of the month, you would owe interest for just one day since the first full month’s payment would be due on the first day of the next month.
Monthly interest is paid in arrears. The reason for this is the manner in which mortgage loans are amortized.
You can find your prepaid interest charges in the Good Faith Estimate provided by your lender and also on your final settlement statement.