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Simple English definitions for legal terms
prepaid interest
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A quick definition of prepaid interest:
Prepaid interest is when you pay some of the interest on a loan before you actually have to. It's like paying for something in advance. For example, if you take out a loan to buy a house, you might have to pay some interest upfront before you start making your regular monthly payments. This can help lower your monthly payments in the long run.
A more thorough explanation:
Prepaid interest refers to the interest paid in advance by a borrower to a lender. It is usually paid at the time of closing a loan or mortgage. This interest is paid to cover the period between the closing date and the end of the month in which the loan was closed.
For example, if a borrower closes a loan on the 15th of the month, they will have to pay prepaid interest for the remaining 15 days of the month. This interest is calculated based on the loan amount and the interest rate.
Prepaid interest is also known as interim interest or per diem interest.
Example: John takes out a mortgage of $200,000 with an interest rate of 4%. He closes the loan on the 20th of the month. The prepaid interest for the remaining 10 days of the month would be calculated as follows:
Prepaid interest = ($200,000 x 4% x 10) / 365 = $219.18
This means that John would have to pay $219.18 as prepaid interest at the time of closing the loan.