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Prepaid interest explanation

Prepaid interest explanation.

What is prepaid interest?

Prepaid Interest is like a mini mortgage payment for the month that you settle in, the month that you’re buying the home.

Example

In this hypothetical example, this buyer is buying their home on June 21st. You see that they’re collecting interest for 10 days from June 21st to July 1st. So they’re paying for all of June’s interest. Again, it’s like a mini mortgage payment for the month that you own the home. You’re not going to pay a whole month’s mortgage payment for June because you didn’t own it the first 20 days. You only owned it the last 10.

When is my first mortgage payment due?

Another thing to consider is that your first full mortgage payment isn’t due until… In this instance, August 1. Why? Why wouldn’t it be due July 1? Well, the mortgage is paid in arrears, it’s paid backwards. So your first of the month mortgage payment is for the month that has just passed. So August one would be for July, September 1 would be for August. So in this case, you go to settlement June 21st, you pay 10 days of interest because you own the home for 10 days. August 1st, you’re going to make your July payment, you pay for the whole month. That’s your first full month of home ownership.

Where do I see these numbers?

So just realize that on page two of the closing disclosure, category F, line 03, depending on your date of closing, you will see some amount of pre­paid interest. I also call it per diem interest.

Can I save money by delaying settlement?

So if you were to close June 31st, this would just be one day. If you were to close June 1st, it would be 30 days. So whenever you close, you close. It’s not like you’re going to save money by closing at the end of the month, because you close when you have to per the contract. Close when you want to. Whatever date works for you, that’s just when you do it. You have to start paying for the home at some point, so don’t focus on the amount of per diem interest. I just want to explain structurally why you see this amount, what it is, and what it’s for.

Let me know if that’s not clear and if you have any questions. Contact me for more prepaid interest explanation, your local housing market, mortgage rates, or other mortgage questions. Click here to schedule a call or you can email me directly.