Prepaid Interest
Prepaid interest is the mortgage interest that borrowers pay at closing for the period between the closing date and the end of that month. This daily interest charge covers the gap until regular monthly payments begin the following month. The amount depends on when during the month closing occurs, with later closings requiring more prepaid interest.
Example
“At closing, the buyers paid $800 in prepaid interest to cover the mortgage interest from their closing date until the end of the month.”
Memory Tip
PREPAID interest is like paying your restaurant bill BEFORE you eat - you pay interest BEFORE you actually owe it.
Why It Matters
Understanding prepaid interest helps buyers budget accurately for closing costs and choose optimal closing dates. Closing earlier in the month reduces prepaid interest but means the first regular payment comes sooner, while closing later increases prepaid interest but delays the first payment.
Common Misconception
Many buyers think prepaid interest is an unnecessary fee they can avoid, when it's actually legitimate interest owed for the days they'll own the property before regular payments start.
In Practice
A buyer closes on their $400,000 mortgage on June 20th with a 6% interest rate, paying approximately $1,300 in prepaid interest to cover June 20-30, with their first regular payment due August 1st covering July's interest.
Etymology
Combines 'prepaid' from Latin 'prae' (before) and 'paid,' with 'interest' from Latin 'interesse' meaning 'to be between' or 'to matter.'
Common Misspellings
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