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What Is The Pre-Paid Interest On A Mortgage?

By Stacy Williams

hat is the pre-paid interest on a mortgage?  Read here to find answers to all of your questions regarding pre-paid mortgage interest!

For many people, being charged pre-paid interest on their mortgage is a surprise and they often are unaware why they need to pay the fee at closing.  There are several questions that many people have regarding pre-paid interest on a mortgage.

Why Is It Needed

One common question in regards to paying pre-paid interest on a mortgage is why it is necessary to be paid.  Pre-paid interest is necessary because when you close on a loan, you are not required to make a payment until the following month.  While a payment is not needed for the first partial month, the loan will accrue interest.  To ensure that the loan does not amortize negatively, a mortgage lender charges the borrower pre-paid interest.

How Is It Calculated

Another common question in regards to paying pre-paid interest on a mortgage is how it is calculated.  Calculating pre-paid mortgage interest is actually quite simple and only requires you to know your principal balance and interest rate.  To calculate pre-paid interest you need to multiply the principal balance by the interest rate and then divide it by the amount of days left in the month you close in.  For example if you have a $200,000 mortgage with 6% interest and close on the 10th of the month, your pre-paid interest would be $658 ($200k * .06/12 * 20/365 = $658).

How Can It Be Minimized

The third common question in regards to paying pre-paid interest on a mortgage is how it can be minimized.  The best way to minimize pre-paid interest is to close on the last day of the month.  By closing on the last day of the month, you will only need to pay one day’s worth of interest.

Related posts:

1. How does a Mortgage Amortize?
2. If My Home Is Paid In Full, Can I Take Out A Home Equity Loan?
3. Can I Pay Off A Home Equity Loan Early?
4. How Do I Calculate Principal Reduction On My Mortgage Loan?
5. How Can I Repay My Mortgage Faster?