If you plan on buying a home in the coming months one of the closing costs that you can expect to pay is prepaid interest, but what exactly is prepaid interest? And why do you have to pay it?
Understanding Prepaid Interest
Let’s say that you close on November 15th; your first mortgage payment will not be due until January 1st.
Even though you may be thinking that December will be a mortgage free month, you still have to pay pre-paid interest on the money borrowed for the period of November 15th through January 1st.
After making your prepaid interest payment your interest will be paid up to January 1st and you will find that you’re going to have a new principal portion or unpaid balance of your mortgage loan.
Should You Wait To Close Until The End Of The Month?
When it comes to closing costs most people will want to save money where they can and they may think that it’s a better idea to close at the end of the month instead of the middle of the month.
This scenario doesn’t always work out because, when you get to the end of the month it’s typical “crunch time” for some lenders due to their timetables so there’s no guarantee that you will be able to close by November 30th versus closing on November 15th and regardless of when you close you will still have to pay interest anyway.
Be Prepared For Paying Prepaid Interest
One of the best things you can do as a home buyer is to be prepared financially for paying prepaid interest and other closing costs before buying a home.
Your lender is required to give you a closing disclosure statement at least 3 days before closing so there won’t be any surprises and you will know the closing costs you can expect to pay.
Depending on the type of mortgage loan you choose your closing costs can amount to up to 5 percent of the purchase price of your home so let’s say that you’re buying a condo for $150,000, the closing costs you can expect to pay could be about $7,500.
Learn More about Prepaid Interest
To learn more about pre-paid interest, or to view homes for sale in Southern California, contact Fred Sed Realty today by calling us at (800) 921-9231 or connect with us through our website.