Prepaid interest fees are part of your upfront closing costs in a home loan.
What Are Prepaid Interest Charges?
Also known as interim interest, these are fees that are due at closing. The prorated interest is calculated for each day from the date of your closing date until your first monthly mortgage payment.
How to Calculate Prepaid Interest
These charges can be found in two forms: Page 2, section F of your Loan Estimate and Page 2, section F of your Closing Disclosure.
The amount may vary slightly on your Loan Estimate, which you receive when you apply for a loan. After the bank confirms the terms and details of your loan, the final prepaid interest charges can be found on your Closing Disclosure.
To calculate, you need to know:
- Your mortgage interest rate
- Your initial loan balance
- The number of days from your closing date to the end of the month
1. Calculate your daily interest rate.
Take your interest rate per annum and divide it by 365. If your annual interest rate is 4%, 4% / 365 = 0.011%.
2. Multiply your daily interest rate by the initial loan balance.
If you are purchasing a $350,000 home loan, you should multiply $350,000 by 0.011% to get $38.50.
3. Multiply the daily prepaid interest charge by the number of days between your closing date and the end of the month.
If your closing date is on the 15th of the month, you’ll likely need to pay 15 days of prepaid interest. In our example, $38.50 x 15 days = $577.50
You’ll need to pay $577.50 upfront upon closing.
Can You Reduce Your Charges?
Your prepaid interest is determined by the number of days from closing until the end of the month. Therefore, you can lower the amount due by choosing a closing date closer to the end of the month.
Of course, you can also negotiate a lower interest rate or attempt to lower your loan amount. However, these factors are more challenging to change.
Additionally, if you choose to delay your closing date, this means that your first mortgage payment will be due sooner.
