What is prepaid interest? Well, first you need to understand that all mortgages throughout the country work the same way. They start on the first day of the month, and they end on the last day of the month. Then your payment is due. So for a mortgage, you are always paying in “arrears,” for the month that you previously lived at the property. With rent, you are paying for the month that you are about to live in the property. So it’s a completely different thing when you transition from renting to owning.
Say you close on the third-to-last day of the month, let’s just say the 29th. So you pay prepaid interest for 1, 2, 3 days, then your mortgage starts, then your first mortgage payment is due the first of the next month.
Also, you have the option of getting a credit for prepaid interest. You have this option if you close between the first and fifth day of the month. Say you close on the 5th with the option to receive prepaid credit. You’d get 1, 2, 3, 4, 5 days prepaid interest credited back to you at your closing.
The way this is calculated is take your interest rate times your loan amount divided by 365. That’s the amount of interest you pay per day, and that is either charged or credited to you at your closing.