Closing Costs Explained
Prepaid Interest: The Closing Cost Nobody Explains
It shows up on every Loan Estimate and every Closing Disclosure. Most buyers have no idea what it is, why it's there, or that the day they close changes the amount. Let's fix that.
The Basics
Mortgage interest is paid in arrears. That's the whole thing.
Most bills work the way you'd expect: you pay for the month ahead. Rent, subscriptions, insurance... you pay first, then you use the service.
Mortgages are the opposite. Your monthly mortgage payment covers interest for the previous month. When you make your April 1st payment, you're paying for March's interest. May 1st covers April. And so on.
This creates a gap at closing. You've borrowed the money, interest is accruing from day one, but your first mortgage payment isn't due for weeks. Prepaid interest fills that gap.
Example: You close on April 20th
Here's exactly how the interest gets collected.
You close April 20th. The lender collects 11 days of prepaid interest at the closing table (April 20-30). May's interest accrues all month. Your first mortgage payment on June 1st pays for May. Every payment after that works the same way: you pay on the 1st for the previous month.
Why Your Closing Date Matters
Close earlier in the month, pay more prepaid interest.
~25 days of prepaid interest
On a $500,000 loan at 6.5%: $2,226
First payment: 1st of month after next
~2 days of prepaid interest
On a $500,000 loan at 6.5%: $178
First payment: 1st of month after next
Closing later in the month means less prepaid interest at closing, but your first payment comes sooner. The total interest you pay over the life of the loan is the same. What changes is how much cash you need at the closing table.
Run Your Numbers
Prepaid Interest Calculator
Enter your loan details and closing date to see exactly what you'll owe in prepaid interest at settlement.
Closing in the first 5 days? You can take an interest credit instead of prepaying the full month. You'll get a credit for each day from the 1st up to your close date, but your first payment comes a month sooner.
Prepaid Interest at Closing
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Daily Interest
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Prepaid Days
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First Mortgage Payment
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Covers Interest For
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Comparing Your Options
For educational purposes only. Not a rate quote or Loan Estimate. Actual prepaid interest may vary based on loan program, closing timeline, and lender policies. All loans subject to underwriting approval.
Common Questions
Prepaid interest, demystified.
Can I avoid prepaid interest entirely?
If you close on the last day of the month, your prepaid interest would be just one day's worth. You can't eliminate it completely because interest starts accruing the day funds are disbursed. Some buyers try to close on the last business day to minimize it.
Is prepaid interest tax-deductible?
Yes, in most cases. Prepaid interest is generally deductible in the year you close, just like regular mortgage interest. Your lender will include it on the 1098 form. Always consult a tax professional for your specific situation.
Why is my first payment so far out?
Because of the arrears structure. If you close March 15th, your prepaid interest covers March 15-31. April's interest will be collected with your May 1st payment. That's why it feels like you skip a month. You didn't skip anything... you already paid for the gap at closing.
Does a "lender credit" cover prepaid interest?
It can. Lender credits can be applied to any closing cost, including prepaid interest. If your lender is offering a credit, ask specifically what line items it covers on your Closing Disclosure.
What if I close on the 1st of the month?
You'd pay a full month of prepaid interest (roughly 30 days). Your first payment would still be the 1st of the month after next. It's the most expensive closing date for prepaid interest, but your first payment is also the furthest out.
Have Questions?
Closing costs shouldn't surprise you.
I'll walk through every line on your Loan Estimate so you know exactly what you're paying, why, and whether any of it can be reduced.
Christian Kosko | NMLS# 1415795 | Fairway Independent Mortgage Corporation
NMLS# 2289 | Equal Housing Lender | Licensed in DC, MD, VA