A line item on an Illinois closing statement shows a charge for prepaid interest. What does prepaid interest represent in this context?
Correct Answer
A) Interest accrued from the closing date through the end of the closing month, collected so that the borrower's first full payment begins a clean amortization cycle.
Prepaid interest — also called per diem interest — covers the interest that accrues from the loan funding or closing date through the last day of that month. Because mortgage payments are made in arrears and the first full payment is due on the first of the second month after closing, the lender collects this short-period interest at closing to keep the amortization schedule aligned. Illinois licensees must distinguish this item from other closing charges when reviewing settlement statements with buyers.
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Related Topics & Key Terms
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Related Concepts
RESPA is a federal law that requires lenders to provide borrowers with information about settlement costs, prohibits kickbacks and referral fees, and limits escrow account deposits. It applies to federally related mortgage loans.
The secondary mortgage market is where existing mortgage loans are bought and sold between lenders, investors, and government-sponsored enterprises (GSEs) like Fannie Mae, Freddie Mac, and Ginnie Mae.
TILA is a federal law that requires lenders to disclose the true cost of credit to borrowers, including the annual percentage rate (APR), total finance charges, and loan terms. It is implemented by Regulation Z.
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