Paying interest on a home loan at closing?

Question

I found this quote online
"...when it is time to close on the loan, the lender will need you to pay the interest on your loan in advance from the closing day to the end of the month..."

Is this something normally included in the closing costs?
How much normally would it be?
Is this a normal thing?

Our closing date is June 20th
Our interest rate is 6.875 with a 30 year fixed rate conventional loan.
So this is something normally included in the closing costs though? Sorry, with closing day only a few weeks away I am really starting to wonder what we will need to bring especially since this is our first time and first house.

Answer 1

I apologize for editing my answer, but I had to add to it because I saw several totally incorrect reponses were made.

The amount of interest owed at closing is not related to your lender in any way. It will be the same amount paid to ANY lender so long as the loan amount, rate, and closing date are the same.

Additionally, this amount is independant of other settlement charges like appraisal, title work, or lender fees.

This amount will be included in your settlement charges, and is part of every loan. Here is how it works:

Unlike rent which is payed forward (rent paid on June 1 is for the month of June) a mortgage is payed backwards. A payment made on June 1 is for the month of May.

If you close a loan on June 15, your first payment will not be due until August 1. That payment will be for the month of July. The interest you pay at closing is the amount that is owed for June 15 until July 1, at which point your first billing cycle begins. The closer to the end of the month you close, the smaller the amount will be.

Here is how you can calculate the EXACT dollar amount. Have a calculator ready!

Take your loan amount and multiply it by your interest rate. Lets use $100,000 at 6% as an example.

100,000 x .06 = 6,000

$6,000 is the annual interest paid on that loan.

Divide 6,000 by the 365 days in a year, and you have your daily interest, usually referred to as "per diem interest"

6,000 / 365 = 16.44

If there are 15 days between closing and the beginning of the next month, you owe for 15 days of interest at $16.44 at closing.

15 x 16.44 = $246.60 "per diem interest" added to your settlement charges.

I hope this explanation and the math make sense! Ill include my office contact information below so you can reach me if you have more questions!

Answer 2

Prepaid interest is a standard part of the closing process. Mortgages are paid in arrears unlike rent which is paid in advance. For example, if you close in June, your first payment will be due on August 1st. That payment will include interest for the month of July. You must pay the interest that accrues between the closing date in June and the end of June and this is normally added on as a closing cost at settlement.

The amount will depend upon how many days are left in the month when you close, as well as your interest rate and the principal on your mortgage. You can calculate this by dividing the interest rate (expressed as decimal, 6% would be .06) by 365, multiplying that by the loan principal and multilplying that by the number of days remaining in the month when you close.

The answer above mine is totally correct and was posted after I started my post so I'll skip the calculations. The first two responses don't address your question and are wrong.

Answer 3

Yes, it's absolutely 100% normal. If you take a 30 year loan, it's always generally 30 years plus 1-30 days. You make 360 payments. The first few days of interest before the new month are always collected at closing.

If you close on the 20th, you'll pay 11 days of interest.

Answer 4

Well depending on the lender and where there located and there policies.

Usually if the lender is out of town they will need delivery time and time for the check to clear.

If its a local bank down the street you have to deal with there banking day's. If you close say Tuesday after 2 or after they close for that type of business they will require the extra day's interest.

Usually the extra interest is on a daily basis. If you have a loan schedule and you have interest owed on the month your closing divide by say 30 then add some for delivery via USPS or Overnight. This will give you a rough guess or check with the title company...

Answer 5

Yes, but when I refinanced about 5 years ago they let me roll the closing costs into the refinanced mortgage so we paid zero out of pocket. I'm not sure if they'll let you do that now, considering the current mortgage environment. The expense of paying the closing costs is why it is usually not recommended to refinance unless your interest rate will be dropping by several percentage points.

Answer 6

closing costs are usually 3% of the total sale, usually around 30,000. Some lenders pay closing costs or incorporate it into the total loan.