In a real estate transaction, what is meant by "prepaid interest"?

"Prepaid interest" in a real estate transaction refers to the interest that a borrower pays in advance for the period between closing and the end of the month. This payment is made at the time of closing for the time that the loan will be outstanding but before the first mortgage payment is due.

For instance, if a property closes on the 15th of the month, the lender may require the borrower to pay interest from the 15th to the end of that month at closing. This ensures that the interest for that time period is covered, allowing the first official mortgage payment to be due at the beginning of the following month.

This concept is important for both buyers and lenders in understanding how interest is calculated and applied in the early days of a mortgage loan, providing clarity on the financial responsibility that comes with new home financing.