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Prepaid Interest Formula:
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Prepaid interest is the interest that accrues on a mortgage loan between the closing date and the date when the first monthly payment is due. It represents the cost of borrowing money for that initial period before regular payments begin.
The calculator uses the prepaid interest formula:
Where:
Explanation: The formula calculates daily interest by dividing the annual rate by 365 days, then multiplies by the number of days in the prepaid period.
Details: Accurate prepaid interest calculation is crucial for proper mortgage closing costs estimation, ensuring borrowers understand the full upfront costs of their loan and helping lenders correctly account for interest accrual from day one.
Tips: Enter the principal amount in dollars, annual interest rate as a decimal (e.g., 0.05 for 5%), and the number of days between closing and first payment. All values must be positive numbers.
Q1: Why is prepaid interest calculated on a 365-day basis?
A: Most mortgages use actual/365 day count convention, meaning interest is calculated based on the actual number of days in the year (365 or 366) for accuracy.
Q2: When is prepaid interest typically paid?
A: Prepaid interest is paid at closing as part of the settlement costs and covers the period from the closing date until the first regular mortgage payment date.
Q3: Does prepaid interest affect my monthly payments?
A: No, prepaid interest is a one-time upfront cost that does not affect the calculation of your regular monthly mortgage payments.
Q4: Can prepaid interest be rolled into the loan?
A: Typically no, prepaid interest must be paid at closing as part of your cash-to-close amount along with other closing costs.
Q5: How many days of prepaid interest are usually charged?
A: The number of days varies but typically ranges from 15-30 days, depending on your closing date and when your first payment is scheduled.