Home Loan What Is Prepaid Interest Charged By A Mortgage Company?

What Is Prepaid Interest Charged By A Mortgage Company?

by Shagun Saini
what is prepaid interest charged by a mortgage company

Here we will study what is prepaid interest charged by a mortgage company? And how it is charged or calculated by using simple steps to do so. Where we also use prepaid interest as the interim interest will be understood.

Before understanding what is prepaid interest charged by a mortgage company? Do you first need to know what is prepaid interest?

What is Prepaid Interest?

Prepaid simply means in advance, so in simple terms, prepaid interest means paying interest in advance. Thus, a prepaid interest refers to the amount of interest due at the closing period that covers up the amount of period between the closing date of your loan and the period covered of the first monthly mortgage payment of yours or the due date of your first mortgage payment.

For example, if your loan closes on the 16th of the month, then you need to pay the prepaid interest of 16 days. And in case your loan or mortgage ends at the end of the month then you need to pay prepaid interest for a day or 2 days only.

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What is Prepaid Interest Charged By a Mortgage Company?

A prepaid interest charged by a mortgage company represents the cost of money borrowed over the time period of your mortgage closing date and the first payment. Here, in most of the cases mortgage lenders charge prepaid mortgage interest on per day basis based on the agreed rate.

So, a mortgage company charges the prepaid interest on the loan or mortgage taken the details of which can be found in the detailed disclosure statement which lists down all the costs related to the property purchase.

Prepaid Interest Accounting:

While referring to the prepaid interest accounting you should know down all the calculations of prepaid interest or how prepaid interest is calculated. Say for example a $ 400,000 home loan exists which has an annual interest rate of 3 %. Where you close down this mortgage or loan 10 days before the end of the month. So, you would calculate your prepaid interest as:

  • Step 1:

You will take down the annual interest rate or your and then divide the same or this annual interest rate by 365 to calculate your daily rate as follows:

= 3 % / 365 = 0.0082 %

  • Step 2:

Then you will multiply your everyday rate with the home loan amount in order to get your daily interest amount as:

= 0.0082 % x $ 400,000

= $ 32.8

  • Step 3:

Then you will multiply the daily interest with the number of days that exist between closing and payment to know the prepaid interest as:

= $ 32.8 x 10

= $ 328

So, $ 328 will be your prepaid interest amount paid for the mortgage loan with a $ 400,000 home loan having an annual interest rate of 3 %, with a closedown of 10 days.

Frequently Asked Questions

  • What is prepaid interest charged by a mortgage company brainly?

A prepaid interest charged by a mortgage company represents the cost of money borrowed over the time period of your mortgage closing date and the first payment. Here, in most of the cases mortgage lenders charge prepaid mortgage interest on per day basis based on the agreed rate.

  • What is prepaid interest?

In simple terms, prepaid interest means paying interest in advance. Thus, a prepaid interest refers to the amount of interest due at the closing period that covers up the amount of period between the closing date of your loan and the period covered of your first monthly mortgage payment or the due date of your first mortgage payment.

  • Does prepaying a mortgage save interest?

Prepay interest on a mortgage can definitely save you from paying interest on a mortgage as you pay for your interest in advance with the principal mortgage amount or you make extra payments on your principal loan balance. So, prepay interest saves interest you are prepaying on a mortgage.

  • What are daily interest charges on a mortgage?

The daily interest charges on mortgage include the mortgage charges from the date of your first mortgage payment to the date you close on your mortgage loan or between these 2 periods, where interest charges on the mortgage are calculated on each day.

Conclusion

Thus, by now we know what is prepaid interest charged by a mortgage company? And how it is charged or calculated by using simple steps to do so. Where we also see prepaid interest as the interim interest that was calculated from the settlement day to the beginning of the first mortgage period. So, we learned what is prepaid interest charged by a mortgage company?

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