What is pre-paid interest?

When you’re going through the home loan process, you’ll find that one of the costs that’ll you’ll see on any Good Faith Estimate, is pre-paid interest. And pre-paid interest is essentially the interest that you are pre-paying on your new loan from the time that your loan funds until the end of the month.

For example, if you were getting a home loan and your loan funded on the 15th of April, you would have to pre-pay interest on the new loan from April 15th to the end of April, and your first payment on the new loan would be due on June 1st, so it would feel like you skipped the month of May.

Because of this, most people try to have their loan fund at the end of the month so that they don’t have to pay as much in pre-paid interest at closing.

Now the most important reason why you need to know about pre-paid interest, other than the fact that you’ll be paying for it at closing, is pre-paid interest is included in the APR calculation. Which means that with all other loan factors being equal, if a loan officer assumes a lower amount of pre-paid days, then they’ll be able to quote a lower APR to you.

Keep in mind that a loan officer isn’t going to know exactly when your loan is going to close, so it’s a bit of an assumption. Now with that said, when you’re getting quotes from different lenders, they’ll typically assume 10-15 days of pre-paid interest when they’re giving you a quote.

The bottom line is that when you are getting an APR quote on a home loan, you should ask the loan officer giving you the quote, how many days of pre-paid interest they are assuming with the quote.

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