What is prepaid Interest? What day of the month should I close?
Closing COSTS! They seem to come out of nowhere on your final settlement statement & one of the line items might be PREPAID INTEREST.
Prepaid Interest is interest on the home you are purchasing that is paid in advance. This is called a PI payment (principal & interest). It covers the period of time in the month between the date the mortgage lender closes your loan and the date the first payment is DUE!
When you think about renting vs. purchasing a home, rent is paid in advance, it's April 1 & rent is due for APRIL (& that's no joke!), right? RIGHT! When you own a home, the same payment you make for April would be for the interest that accumulated in March and any principal that is being paid down. Confusing enough, right?
So, if your loan closes on the 15th of the month, you will end up paying 15 days of interest when you close. If you close closer to the end of the month you might end up paying a day or two. Since most buyers are strapped for cash when purchasing their home they choose to close at the end of the month to avoid paying prepaid interest. By the same token if you choose to close on the 11th of the month you will end up paying 19 days of prepaid interest (all closing costs are based on a 30 day calendar) but your first mortgage payment won't be due until the first of the following month. It's important to seek all the numbers from your lender so you can make a good decision on closing dates.
So, when you are purchasing a home remember, mortgages look back, rent looks forward & the lender looks at YOU to make the payment!
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