- The Washington Times - Thursday, July 28, 2005

Q:Can you explain interim interest when you purchase a home and when is the

best time to close on a new mortgage?

A: Interim interest, often called prepaid interest, is simply the daily interest charged from the day the loan is funded through the end of the month.

There’s a common perception that closing a mortgage at the end of the month saves the borrower money. I’ve heard real estate agents insist that their clients settle at the end of the month because they save a month’s interest charges.

Even worse, I’ve heard mortgage advertisements assert that one of the benefits of refinancing a mortgage is that the borrower skips one month’s mortgage payment and therefore gets a “free” month.

Settling at the end of the month doesn’t “save” any money, and you certainly don’t get anything free.

For a purchase transaction, settling at the end of the month lessens the amount of prepaid interest that’s charged to the buyer. The first mortgage payment is always due on the first day after the first full calendar month after the loan closes.

For example, if a buyer’s settlement date is on the last day of the month — let’s say June 30 — his first mortgage payment will be due on Aug. 1, because July is the first full month after June 30.

Remember that mortgage payments, unlike rent payments, are made in arrears, not in advance. A June 30 settlement would mean that the borrower would need to come up with only one day’s interest at settlement. His first mortgage payment is due Aug. 1.

If the settlement date were bumped to Aug. 1, the borrower would have to come up with 31 days of interest to cover all of August, but his first mortgage payment wouldn’t be due until two months later, on Oct. 1.

So it all comes out in the wash. Settling at the end of the month means the buyer needs less cash at settlement. This would be advantageous for purchasers who are low on cash.

Calculating the daily interest is easy. Simply take the loan amount and multiply it by the interest rate. This gives you the annual interest charged. Divide the annual interest by 365 days to get the daily interest. A $300,000 loan at 5.75 percent equals $17,250 in annual interest, and $17,250 divided by 365 equals $47.26 per day.

In this example, the prepaid interest would be equal to $47.26 multiplied by the number of days between the settlement date and the end of the month.

Unless the borrower is very tight on cash, the best settlement date is one that’s convenient for everyone.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by

e-mail (henrysavage@pmcmortgage.com).

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