Prepaid interest is the interest collected at closing for the days between loan funding and the start of the normal payment cycle.
Prepaid interest is the interest collected at closing for the days between loan funding and the start of the regular mortgage payment cycle.
Prepaid interest matters because it affects cash-to-close and often surprises borrowers who thought the first payment schedule meant no interest was due until later. In reality, interest begins accruing once the loan is funded, so the lender usually collects those interim days at closing.
This term also matters because borrowers often confuse it with points or ordinary recurring interest. Prepaid interest is not a buy-down feature and it is not the same as the interest portion of a normal monthly payment.
Borrowers encounter prepaid interest near closing, when final cash requirements are being calculated. The amount often depends on the closing date because the lender is collecting interest for the partial period before the regular payment cycle begins.
That means closing later or earlier in the month can change this line item even when the note rate and loan amount stay the same.
A borrower closes near the middle of the month. The lender collects prepaid interest to cover the days from funding until the date the regular monthly payment cycle effectively starts. That amount becomes part of the closing cash rather than the future payment schedule.
Prepaid interest differs from Discount Points. Points are upfront pricing choices used to change the rate. Prepaid interest simply covers accrued interest for the partial closing period.
It also differs from Monthly Payment. The monthly payment is the regular scheduled bill after closing. Prepaid interest is a one-time closing item for the interim days before that routine begins.