Prepaid Interest
Direct definition
Prepaid interest is the interest charged from the closing date through the end of that month, collected upfront at closing.
Written by the Vabasso Mortgage Editorial Team · Reviewed against agency and federal sources · Read our editorial policy for how we research and review mortgage content
Plain-English explanation
Because mortgage interest is paid in arrears, closing mid-month creates a gap between funding and the first regular payment. Prepaid interest, sometimes called per diem interest, covers that gap so the loan starts accruing correctly.
Why it matters
This is a real cost due at closing, and the amount depends on the closing date and days remaining in the month.
Where you may see it
- Closing disclosure
- Loan estimate
- Cash-to-close calculation
A real-world example
Educational and illustrative only
A common misunderstanding
Prepaid interest is not an extra fee or profit for the lender — it's simply interest for days you'll own the home before your first scheduled payment.
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- Author
- Vabasso Mortgage Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026