Interest accrues from the day the loan funds to the day the first payment covers - here is how that figure is built
A mortgage payment is made in arrears - the payment due on the first of a month covers the interest that accrued during the month before. But a loan rarely funds on the last day of a month, so there is a stretch between the funding date and the start of the first full period that no scheduled payment covers.
That gap is collected at the closing table as prepaid interest, sometimes called odd-days or per-diem interest. It is one of the few closing figures that changes every single day the closing slips.
Three inputs, and none of them are negotiable at the table: the loan amount, the note rate, and the calendar.
On a $432,000 loan at 5.0%, funding on 12 September with a first payment due 1 November:
The first payment on 1 November then covers October in the ordinary way. The 19 days of September are what the borrower brings to closing.
The calculation above uses a 365-day year. That is the common convention for prepaid interest at closing, and it is worth being explicit about because other parts of a loan file do not always use it - some lender worksheets compute interest on a 360-day basis, which produces a slightly higher per diem on the same rate and balance.
If your figure and the lender's disagree by a small margin on an otherwise identical rate, balance and day count, the basis is the first thing to check.
Whether the count includes both the from-date and the to-date is a convention, and it changes the total by exactly one per diem. Lenders differ. Because the figure has to match what the lender funds, this is worth confirming against the lender's own worksheet rather than assuming, particularly on a large balance where one day is a material number.
On a Closing Disclosure, prepaid interest belongs in the Prepaids section - not in Loan Costs. This trips people up, because prepaid interest is unmistakably a cost of getting the loan and sits next to origination charges in most people's mental model of a closing.
The distinction the form draws is not about who benefits from the charge but about what kind of charge it is. Loan Costs are fees for making the loan. Prepaids are amounts paid in advance for something that will continue after closing - interest, insurance premiums, taxes. Prepaid interest is the first of those, and it is disclosed alongside the others.
Getting this wrong is not merely cosmetic: charges in the Loan Costs sections are subject to different treatment from prepaids, so a misplaced prepaid interest figure can move totals that are compared against earlier disclosures.
Divide the annual interest rate by 365 to get a daily rate, multiply by the loan amount to get the per diem, then multiply the per diem by the number of days between funding and the start of the period covered by the first payment.
Mortgage payments are made in arrears, so the first payment covers the preceding period. The days between the loan funding and the start of that period are not covered by any scheduled payment, so the interest for them is collected at closing.
Prepaid interest at closing is commonly calculated on a 365-day year. Some lender worksheets use a 360-day basis, which yields a slightly higher per diem on the same rate and balance, so it is worth confirming which basis the lender used if the two figures disagree.
No. Prepaid interest is disclosed in the Prepaids section, not in Loan Costs. Loan Costs are fees charged for making the loan, while prepaids are amounts paid in advance for something continuing after closing, such as interest, insurance and taxes.
Yes. The figure is a per diem multiplied by a day count, so every day the closing moves changes the total by one day's interest. It has to be recalculated rather than carried over from the earlier figure.
Prorations, prepaids, recording charges and payoffs are calculated on the matter and flow straight onto the Closing Disclosure, the settlement statements and the disbursement ledger.