What is prepaid interest?
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 interest is paid in arrears, a 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 15, the first mortgage payment is due August 1. The lender will calculate an interest amount per day that is collected at the time of closing. This amount covers the interest accrued from June 15 to July 1.
Prepaid InterestPrepaid interest is interest that you pay in advance. Prepaid interest can only occur at the closing of a loan. It is a one-time thing. The following may help me illustrate this. When you rent an apartment you pay rent on the first day of the month for the month that you are going to live there (On Aug. 1 you pay rent to live in the apartment for the month of August). When you have a mortgage you pay the interest at the end of the month for the month that you have already lived in the home. It gets a little confusing because your monthly payment is due on the first of the month. What most people don’t realize is that they are paying the lender for the previous month’s interest (your Aug. 1 payment is applied to the interest owed for July). In other words, interest on a mortgage is paid in-the-rears. I could explain why but, that would take way to long and isn’t necessary for this explanation. When you buy a home you will probably close escrow in the middle of the month.
