Prepaid Interest - Prepaid interest is collected by the lender, to pay for the interest charges for the remainder of the month durring which the loan closes escrow.

Prepaid interest is calculated by multiplying the per diem (per day) interest on the loan by all of the remaining days in the month (remaining days start on the day the loan funds). A refinance transaction generally funds 3 days after the closing date (Sundays and holidays excluded) and a purchase transaction generally funds on the closing date.

Example: purchase transaction closes on 01/25/06 (funds same day)
$25.50 is per diem interest on loan (interest per day)
x 7 days left in the month
= $178.50 prepaid interest on this mortgage transaction

Closing later in the month will decrease the prepaid interest collected at closing. If you are seeking to minimize closing costs, this is something to consider.

Mortgage interests are paid in arrears, after they are earned by the banks. For instance, the interest portion of the June morgage payment pays for interest accrued from May 1 to May 31. Prepaid Interest, on the other hand, is interest paid on the day of settlement, prior to being earned by the bank, hence the term "pre-paid".

During a refinance interest will also be charged by the preceding bank. Usually 30 days of interest is charged, above the actual principal balance, at the time the bank issues a payoff amount. This will need to be paid forward, and a reimbursement will be issued for the balance within 30 days.

If you close early in the month you can get an interest credit and pay no pre paid interrest for that month. However your payments will not skip a month and your first payment will be due on the first day of the following month.

Prepaid interest must be disclosed on the Good Faith Estimate along with other closing costs. The amount expressed on the Good Faith Estimate will correspond with the estimated closing date indicated. The amount of prepaid interest that you will actually pay at closing will correspond to the actual closing date.

Paying Points is considered pre-paid interest and is tax deductable over the life of the loan.

Pre-payment penalties are generally considered pre-paid interest and are generally tax deductible. Please consult your CPA to see how pre-paid interest may benefit your personal tax situation.

Although you will pay prepaid interest at the time of the closing of a new loan, you will almost always skip one months mortgage payment as well.

Do not confise prepaid interest charged by the new lender for the new mortgage, with interest paid to and charged by the loan being paid off. Usually the lender being paid off will charge interest for 30 to 45 days forward from the day the recieve the payoff demand.

Prepaid Interest & Interest Paid in Arrears - Prepaid interest (or per diem interest) is the interest charged to a borrower at closing to cover interest on the loan between closing date and the end of the month.

Example: If a loan funds on the 19th of the month, (and there are 30 days in the month) and the first payment is due on the first of the following month, the new lender will charge 12 days of prepaid interest. If the loan closes one day before the end of the month, then only 1 of interest is charged.

Note: When an FHA loan is refinanced, a full 30 days of interest is charged regardless of when the loan is paid-off. To accommodate for this, we will close our new loan at the end of the month so the borrower does not pay unnecessary double-interest.

Arrears is an interest payment made after its due. Interest is said to be paid in arrears since it is paid to the date of payment rather than in advance. For example, an October mortgage payment will pay for the Septembers interest.

Per Diem interest should not be viewed as a cost or fee. If the loan is not pursued,
interest still needs to be paid to the exsisting lender for that time frame.

Many people believe think that when you obtain a new mortgage you get to skip a month's payments; the payment is actually only deferred. The skipped payment will be made up at the end of the loan because mortgage interest is paid in arrears. This is one reason the payoff amount of a home is often higher than the loan balance.

Mortgage interest always being paid in arrears is why your loan balance never seems to go down, especially on 30 year mortgages. If you have a mortgage that is 100,000 dollars and your payment is 1,000 dollars and $900 goes towards interest and $100 goes towards principal, when you make your first payment your actual balance would be $100,900 on the date your first payment was due. When you make your first payment of $1,000, $900 will go towards interest which will bring your balance back down to your original loan amount of $100,000 and the other $100 will go towards the principal of your loan, which would bring your balance down to $99,900. This is how your mortgage loan balance works and why your balance seems to take forever to decrease. The above example is using generic numbers to help explain interest paid in arrears on a mortgage loan.

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