Escrow & Title
A Connecticut buyer's closing disclosure shows a $3,500 debit for 'prepaid interest.' This amount represents:
AA penalty for paying off the loan early
BInterest on the new mortgage from the closing date to the end of the closing month✓ Correct
CThe first month's mortgage payment
DAccrued interest on the seller's existing mortgage
Explanation
Prepaid interest (also called per diem interest) is collected at closing to cover the interest from the closing date to the end of the month. The first full mortgage payment (covering the following month) is not due until later.
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Key Terms to Know
Discount Points
Prepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
AmortizationThe gradual repayment of a loan through scheduled periodic payments that cover both principal and interest.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Loan-to-Value Ratio (LTV)The ratio of a mortgage loan amount to the appraised value or purchase price of a property, expressed as a percentage.
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