Prepaid interest in this transaction applies to which period?

Prepaid interest in this transaction applies to which period?

• A. The balance of the closing month
• B. The next full month
• C. The entire loan term
• D. The balance of the year

Answer: (A)

Prepaid interest is the interest charged for the days from the closing date through the end of that same month. Mortgage interest accrues daily, and the new loan begins on the closing date, so the lender collects interest for the remaining days of the closing month at closing. The first full monthly payment won’t be due until the next month starts, making the prepaid amount specifically for the balance of the closing month rather than for the next month, the entire loan term, or the year.

Prepaid interest is the interest charged for the days from the closing date through the end of that same month. Mortgage interest accrues daily, and the new loan begins on the closing date, so the lender collects interest for the remaining days of the closing month at closing. The first full monthly payment won’t be due until the next month starts, making the prepaid amount specifically for the balance of the closing month rather than for the next month, the entire loan term, or the year.