When you review your closing disclosure, you'll see a line item called prepaid interest or interim interest. This often catches borrowers off guard because it can run into four figures, and it's due before your first regular payment. Understanding how this works removes the surprise and helps you plan your cash-to-close.
What prepaid interest covers
Prepaid interest is the daily interest that accrues on your loan from the day you close until the last day of that month. Mortgage payments are paid in arrears—your first regular payment covers the prior month's interest. Because closing rarely happens on the first of the month, there's a gap between closing and the start of your first full payment cycle. Prepaid interest fills that gap.
This is not a lender fee, an origination charge, or double-payment. It's actual interest you owe on the principal balance for the days you hold the loan before your payment schedule begins.
How per-diem interest is calculated
Your lender calculates a daily interest rate by dividing your annual rate by 365, then multiplying by your loan amount. If you're borrowing $300,000 at an annual rate of 7.3%, your daily interest is roughly $60. These figures are illustrative; rates and products are subject to change and this is not a commitment to lend.
If you close on the 10th of the month, you'll prepay interest for 21 days (the 10th through the 30th in a 30-day month). At $60 per day, that's $1,260 due at closing. Close on the 25th and you owe six days—$360. Close on the last day of the month and you owe one day.
Why closing date matters for cash-to-close
Closing early in the month increases your prepaid interest and your total cash due at the table. Closing late reduces it. Some borrowers deliberately target an end-of-month closing to lower upfront costs, understanding their first payment will be due sooner—typically the first of the second month after closing.
There's no financial advantage either way over the life of the loan; you're simply shifting when you pay. Early-month closings give you more time before the first payment. Late-month closings reduce immediate cash need but compress your payment-free window.
The first payment and ongoing schedule
After prepaid interest is satisfied, your first regular payment is due on the first of the month following a full calendar month. Close on January 10th, and your March 1st payment covers February's interest. That payment and every one after is collected in arrears for the prior month.
Prepaid interest does not appear again. It's a one-time line item that bridges closing day to your payment cycle.
The Alliance take
Knowing your prepaid interest ahead of time prevents cash-flow surprises and lets you choose a closing date that fits your budget and timeline. Your loan estimate and closing disclosure will show the exact per-diem calculation and total prepaid amount. If you have questions about how closing date affects your costs, start an application and we'll walk through the numbers with you before you lock.