Let’s Break Down Prepaid Mortgage Interest

For us, few moments are better than when our clients close on a new home. It’s always a great feeling when the grind pays off for those we serve.

Of course, it’s an exciting moment for our clients, too. It’s also a time when questions may arise, such as those concerning prepaid mortgage interest.

We thought it would be a smart idea to break down the ins-and-outs of prepaid interest so that you know exactly what to expect on your closing day.

Let’s define what prepaid mortgage interest is

You may be asking, “don’t I already pay interest as part of my monthly payments?” Yes, but this is not the same as prepaid interest. So, what is this prepaid interest, exactly?

Also known as interim interest, this is the amount of interest accrued by a borrower between the date of closing and their first monthly mortgage payment.

Unlike cutting a rent check, which covers you for the upcoming month, mortgage payments cover you for the previous month. This means that your interim interest payment will catch you up to the mortgage billing cycle that’s waiting for you whenever your first payment is due.

Please note that this prepaid interest is charged by your lender and is due at closing. Once paid, you’re able to begin your mortgage billing cycle free of any interim costs accruing during the period between closing and the start of your first monthly payment.

An example of how to calculate prepaid interest

Let’s say that you were one of this year’s buyers who purchased a home in the fall season. After an intense house-hunt, you’re excited to find a property that’s best for you.

Let’s say that you close on October 15, and your mortgage payment cycle is set to begin on the first of the month. Keeping in mind that mortgage payments are backdated for a full month’s worth of a loan, here’s how your prepaid mortgage interest would be determined:

• Your very first mortgage payment would be due on December 1 since you would need a month of holding the loan to be reported as your first payment.
• This leaves an extra 15 days (between October 15 and November 1) of unpaid interest.
• Therefore, your prepaid interest would accrue between the date of closing and November 1, which is 15 days’ worth.

This allows you to begin your first monthly payment in December untethered by the interest garnered in the 15 days before your billing cycle. Asking for these funds at closing leaves you in the clear to begin paying the first mortgage payment more predictably.

Preparing to prepay

Here are some ways to set yourself up for a successful closing so that you’re not surprised by the interim interest.

• Set aside money, especially if cash-flow is tight.
• Select a closing date that will leave you room between your first monthly payment and your closing costs. This means you won’t have two large payments back-to-back

Without question, the best way to navigate either of these strategies is to speak with a trusted loan officer at your local mortgage broker’s office. These professionals are prepared to help you move into your new home in a way that minimizes the upfront costs associated with homeownership.

Are you ready to close with confidence?

We’re ready to help! Our talented team of mortgage experts is ready to guide you through the closing process so that you can land in the home of your dreams in the most affordable way possible.

We connect buyers with the lenders who will best serve their needs while working hard to save you money.

Whether you have questions about prepaid mortgage interest or general questions about what to expect on closing day, we’re available with solutions.

Reach out to one of our loan officers to begin your journey home.