Hello! This is Joe Harris with Morgan Financial and here is your “Joe Knows Mortgages MINUTE.” This week, we answer the question: What is prepaid interest?
You’re getting ready to close on your home, your lender sends your closing disclosures for you to review, and you see a section for “prepaid interest” on your closing disclosures. What exactly is prepaid interest? When you see this on your closing disclosures, this is essentially an up-front payment to pay for your first month’s interest. But why is it paid this way?
Interest is paid in arrears, meaning your monthly mortgage payment pays for the previous month’s interest, which doesn’t begin accruing until after you’ve closed on your loan. So, let’s say you close in the middle of June. You typically won’t make your first mortgage payment until August because you’ve already paid for July’s interest and principal at closing!
In short: prepaid interest is just that – interest you’re pre-paying at closing.
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