If you analyze your home loan documents closely, you will notice a line item for prepaid interest. This is an expense that is paid to your mortgage lender, and it can be a significant amount of money. What is prepaid interest, and why do you need to pay it?
For many of your monthly bills and debts, your payment will apply to the upcoming month or billing cycle. For example, the rent that you pay at the beginning of the month covers your housing expense for the rest of that month. However, with a mortgage, you are paying in arrears. This means that your payment is applied to the billing period that just ended. However, most homebuyers do not close on their home on the last day of the month. Consider if you close on the 15th of the month. You are responsible for paying interest from the 15th through the last day of the month. Rather than collect this additional interest on your first mortgage payment, the lender collects it upfront. This means that all of your future monthly payments can be stable.
Are you trying to estimate the amount of prepaid interest that you may be responsible for, or do you have questions about other closing costs? At MortgageDepot, we take pride in guiding each of our customers through their home loan experience. Our team is available to answer all of your questions about prepaid interest and other closing costs. Contact our loan origination team today to learn more.
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