What Is Prepaid Interest?
Prepaid interest is the interest a borrower pays at closing to cover the period between the closing date and the start of the first regular mortgage payment. Because mortgage interest is normally paid in arrears, this upfront charge "fills the gap" so the loan's payment cycle starts cleanly on the first of the following month.
How It Is Calculated
- It is figured as a daily ("per diem") amount of interest
- Multiplied by the number of days from the closing date to the end of the month
- The earlier in the month you close, the more days of prepaid interest you owe
Prepaid Interest at a Florida Closing
Prepaid interest is a standard line item among a buyer's closing costs and appears on the Closing Disclosure. For example, closing on the 20th means paying interest for roughly the last 10–11 days of that month; the first full monthly payment is then typically due on the first of the next month. Some buyers intentionally schedule closing late in the month to reduce prepaid interest due at the table.
Related Terms
- Closing Disclosure — Where prepaid interest is itemized
- Mortgage — The loan the interest relates to
- Payoff Statement — Also uses a daily interest figure
Barnes Walker Real Estate
Barnes Walker's title professionals and real estate attorneys prepare and explain closing figures, including prepaid interest, on Florida transactions. Request a legal inquiry for assistance.
Reviewed by the attorneys at Barnes Walker, Goethe, Shea & Robinson, PLLC