What is pre-paid interest?
Pre-paid interest is an amount you pay at closing which represents the interest that will accrue between the day your loan closes and the last day of that month. For example, if your loan closes on the 20th day of a 30-day month, at closing, you will pay interest owed for the remaining 10 days of that month.
This is interim interest that accrues on the mortgage loan from the date of the settlement to the beginning of the period covered by the first monthly payment. Since you pay interest in arrears, your mortgage payment made in June actually pays for interest accrued in the month of May. Because of this, if your closing date is scheduled for June 25, your first mortgage payment will be due August 1 (and will pay for the interest for the month of July). The lender will then calculate an interest amount per day that is collected at the time of closing (hence the name pre-paid). This amount covers the interest accrued from June 25 to July 1.
This is interest due from the date of a loan closing to the first day of the following month. Most loans require payments to be due on the first day of the month. Each monthly payment reflects the principal and interest due on the loan for the previous month. A loan closing on the 20th day of the month will require an interest adjustment through the 1st day of the following month. The first payment will then be due on the 1st day of the following month. For example, if you close on June 20th, interest will be collected for the period of June 20th through June 30th. Your first mortgage payment will be due on August 1st.
