A buyer's Illinois closing disclosure shows a line item for prepaid interest. Which statement most accurately describes what that charge represents?
Correct Answer
D) It is the interest that accrues from the closing or funding date through the end of that month, collected so the regular amortization schedule can begin on the first of the following month.
Prepaid interest represents the odd-days interest charged from the loan's closing or funding date to the end of that calendar month. Because mortgage payments are typically due on the first of the month and paid in arrears, the lender collects this short-period interest at closing to synchronize the borrower's payment schedule with the loan's interest accrual cycle.
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Related Topics & Key Terms
Key Terms:
Related Concepts
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.
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
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