National Real Estate Exam (PSI)Transfer of TitleHard
A buyer's new loan is $150,000 at 6% annual interest, and the lender calculates interest using a 360-day year. Closing occurs on September 21, and the first mortgage payment (covering October's interest) is due November 1. How much prepaid interest must the buyer pay at closing for September 21 through September 30 (10 days)?
- A$200
- B$250
- C$225
- D$275
Show answer & explanationAnswer & explanation
Correct answer: B. $250
Daily interest = $150,000 × 0.06 ÷ 360 = $25/day. For 10 days (Sept 21–30), prepaid interest = 10 × $25 = $250. This amount is collected from the buyer at closing as a debit because mortgage interest is paid in arrears and the lender needs interest covered from closing until the first full payment period begins.
Why the other options are wrong
- A. This understates the daily interest calculation.
- C. Close, but does not match the correct $25/day rate times 10 days.
- D. This overstates the amount owed based on the given rate and day count.
Prepaid (Interim) Interest
Interest collected at closing to cover the period between the closing date and the start of the first full mortgage payment cycle.
- Mortgage interest is typically paid in arrears
- Lenders often use a 360-day year for calculations
- Daily interest = loan amount × rate ÷ 360 (or 365, depending on convention)
Memory trick: Loans charge interest 'behind,' so buyers prepay the gap days at closing.