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.
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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 cases, mortgage lenders charge prepaid mortgage interest on per daily 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.
How Do Mortgage Prepaids Work?
As the name suggests, prepaids are upfront cash payments made before your down payment to obtain a mortgage. Prepaid costs are paid at closing and placed into an escrow account to cover mortgage expenses that are typically included in monthly homeownership-related fees.
What Is The Difference Between Prepaid And Escrow?
Prepaid items are one-time charges, paid at the time a real estate transaction is closed, or finalized. Escrow accounts are a continuing expense, typically billed monthly by the lender. The monthly statement should list the amount of principal, interest and amount for escrow.
How Is Prepaid Interest Calculated At Closing?
Explaining prepaid interest
The closer to the month-end you close, the less you’ll have to pay. The way to calculate your prepaid interest is first to take your annual interest rate and divide it by 365 days. Then take that number and multiply it by your home loan amount.
Is It Better To Use Escrow Or Not?
Pros of an escrow account
Having your mortgage lender or servicer hold your property tax and homeowners insurance payments in escrow ensures that those bills are paid on time, automatically. In turn, you avoid penalties such as late fees or potential liens against your home.
What Is An Example Of Prepaid Interest?
A mortgage payment on April 1, for example, pays the interest for March. When interest is paid before it accrues, that payment is an example of prepaid interest.
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?