Home
Back
Prepaid Interest Formula:
| From: | To: |
Prepaid interest is the interest that accrues on a loan between the closing date and the date when the first regular mortgage payment is due. It represents the cost of borrowing money for that initial period.
The calculator uses the prepaid interest formula:
Where:
Explanation: The formula calculates daily interest by dividing the annual rate by 365 days, then multiplies by the number of days to determine the total prepaid interest amount.
Details: Calculating prepaid interest helps borrowers understand the upfront costs associated with a loan, particularly for mortgage transactions where interest is typically paid in arrears but prepaid at closing.
Tips: Enter the loan amount in dollars, annual interest rate as a percentage, and the number of days for which interest is being prepaid. All values must be positive numbers.
Q1: Why is prepaid interest calculated using 365 days?
A: Most lenders use the actual number of days in a year (365) for daily interest calculations, though some may use 360 days for simplicity.
Q2: When is prepaid interest typically required?
A: Prepaid interest is most common in mortgage transactions, where borrowers pay interest from the closing date until the end of the month before regular payments begin.
Q3: Is prepaid interest tax deductible?
A: Prepaid interest on a mortgage may be tax deductible in the year it's paid, but you should consult with a tax professional for specific advice.
Q4: Can prepaid interest be negotiated?
A: While the calculation itself is straightforward, some lenders may be flexible about when the first payment is due, which affects the number of days of prepaid interest.
Q5: Does this calculation work for all types of loans?
A: This formula works for simple interest loans. Compound interest loans or those with different accrual methods may require different calculations.