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 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 Editorial Team
- Reviewed by
- Vabasso Mortgage Licensed Advisory Team
- Last reviewed
- July 30, 2026