A $360,000 mortgage at 6% closes and disburses on June 24. Its first payment, due August 1, covers July interest. The agreement collects prepaid interest from June 24 through June 30, including both dates. How many days of prepaid interest are collected at closing?
Correct Answer
C) Interest for 7 days of June is collected at closing as prepaid
C. Seven days of June interest are prepaid. Count June 24, 25, 26, 27, 28, 29 and 30: seven days. July is covered by the first scheduled payment, not this prepaid period. Scope and exceptions: The result follows this agreement and disbursement date. Do not claim every midmonth closing always collects positive prepaid interest. A dollar calculation additionally requires the applicable day-count convention. Source: Definition of prepaid interest charges — https://www.consumerfinance.gov/ask-cfpb/what-are-prepaid-interest-charges-en-161/
Why This Is the Correct Answer
C. Seven days of June interest are prepaid. Count June 24, 25, 26, 27, 28, 29 and 30: seven days. July is covered by the first scheduled payment, not this prepaid period. Scope and exceptions: The result follows this agreement and disbursement date. Do not claim every midmonth closing always collects positive prepaid interest. A dollar calculation additionally requires the applicable day-count convention.
Why the Other Options Are Wrong
Option A: No interest is collected, because the first payment covers June
The first payment covers July, leaving the specified June period payable.
Option B: Interest for all of July is collected at closing as prepaid interest
It selects the wrong month.
Option D: Interest for 37 days is collected, covering both June and July
It adds July even though that month is covered separately.
Exam Tip
Identify the funded date and first payment coverage before counting days.
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