Prepaid interest. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year.
Mortgages are paid in arrears which means your payment is for the previous month’s principal and interest. If you’re buying and the closing date is March 3rd you are within the interest credit window. Your next mortgage payment would be April 1st. Your April mortgage payment includes all 31 days of interest in March.
All mortgage loans have closing costs, and these fall into hard costs such. escrow for taxes and insurance and depending.
With a new loan, you need to prepay interest that accrues from the closing date to the end of the month. So if you close on March 16, you’ll have to pay for 15 days of interest. By closing on March 30, you’ll only pay interest for March 30 and 31. Smart move 8. Make sure the costs on your Loan Estimate and settlement papers match.
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Answer: Prepaid interest charges are charges due at closing for any daily interest that accrues on your loan between the date you close on your mortgage loan and the period covered by your first monthly mortgage payment. This amount is listed on Page 2, section F of your Loan Estimate and Page 2, section F of your Closing Disclosure.
Multiply the daily interest by the number of days between closing and payment to get the prepaid interest charge = $21.92 x 10 days = $219.20 Your own prepaid interest will obviously vary depending on the loan amount and rate that go into your calculation, but a median mortgage loan of $200,000 at current rates should come out to roughly $22 per day.
Prepaid interest is collected by the mortgage lender to pay for the interest charges for the rest of the month during which the loan closes escrow. If you are seeking to minimize closing costs, consider closing later in the month to decrease the prepaid interest collected at the closing. Mortgage interests are paid in arrears after they are earned by the lenders.
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