On a mortgage closing statement, prepaid interest is best described as which of the following?
Correct Answer
A) Interest collected at closing that covers the period from the closing date through the end of that month, before regular monthly payments begin.
Prepaid interest — sometimes called odd-days interest — accrues from the closing or funding date through the last day of that month. Because most mortgages are paid in arrears with the first full payment due on the first of the second month following closing, the lender collects this short-period interest at closing to ensure no gap in interest accrual. The amount is calculated as: (Loan Amount × Annual Rate ÷ 365) × Number of Days.
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Related Topics & Key Terms
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Related Concepts
In the context of foreclosure, a deed transfers ownership of the foreclosed property to the new owner, typically the buyer at a foreclosure sale.
Discount points are upfront fees paid to a lender at closing to reduce (buy down) the interest rate on a mortgage loan. One point equals 1% of the loan amount and typically reduces the rate by approximately 0.25%.
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
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