Interim interest on a mortgage is a one-time, pro-rated interest charge you pay at closing to cover the days between when your loan is funded and when your first regular monthly payment cycle begins. The amount depends on your loan balance, your interest rate, and the number of days left in the month after you close. Mortgage interest is paid in arrears, meaning each monthly payment covers the previous month’s interest, so without this upfront charge there would be a stretch of days when the lender had disbursed your loan but had no scheduled payment to collect interest on.
Why You Owe It
Interest starts accruing the day the lender disburses your loan proceeds, whether the money goes to the seller, to you, or into escrow. That accrual runs through the last day of the closing month. Your first regular mortgage payment is then typically due on the first day of the second full month after closing, and it covers the interest for the month before it.
Close on June 15 and you skip July as a payment month. Your first payment is due August 1 and covers July’s interest. The interim interest collected at closing covers June 15 through June 30, the days that no monthly payment would otherwise reach.
How the Per Diem Is Calculated
Interim interest uses a simple daily rate multiplied by the number of days from closing through the end of the month:
- Multiply your loan amount by your annual interest rate to get annual interest.
- Divide that by 365 to get the daily, or per diem, rate.
- Multiply the per diem by the number of days from your closing date through the last day of the month.
On a $400,000 loan at 7%, annual interest is $28,000. Divided by 365, the per diem is about $76.71. Closing on June 15 means 16 days of interim interest, or roughly $1,227. Closing on June 28 means only 3 days, or roughly $230.
Most residential lenders use a 365-day year. Some commercial lenders use a 360-day year, which produces a slightly higher daily rate. Your Loan Estimate spells out the per diem amount, the day count, and the interest rate the lender used, so you can check the math before you sign.1eCFR. 12 CFR 1026.37 – Content of Disclosures for Certain Mortgage Transactions
How Your Closing Date Changes the Bill
Because the charge is calculated by the day, the date on your settlement calendar directly controls how much cash you need at closing. Close early in the month and you pay more days of interim interest. Close near the end and you pay fewer.
- Closing on the 2nd of a 30-day month means 29 days of interim interest. On a $400,000 loan at 7%, that is roughly $2,225.
- Closing on the 28th of the same month means 3 days, or roughly $230.
The gap between those two scenarios is nearly $2,000 in real cash owed at the table. Borrowers who are tight on funds sometimes schedule closing for the last days of a month for exactly this reason. The total interest you pay over the life of the loan does not change; only the timing shifts, moving those days out of your closing costs and into your first monthly payment cycle.
Where to Find It on Your Closing Documents
Regulation Z requires lenders to disclose interim interest on both the Loan Estimate you receive shortly after applying and the Closing Disclosure you receive before settlement. On both forms, it sits under the “Prepaids” subheading in the “Other Costs” section of the Closing Cost Details.2Consumer Financial Protection Bureau. 12 CFR 1026.38 – Content of Disclosures for Certain Mortgage Transactions (Closing Disclosure) The line item usually reads something like “Prepaid Interest ($76.71 per day for 16 days @ 7.000%).”
When your Closing Disclosure arrives at least three business days before settlement, compare the prepaid interest line to the same line on your Loan Estimate. If your closing date has shifted, the day count and total will shift with it, but the per diem rate should match.
Interim Interest on a Refinance
Refinances follow the same rule, with a twist that catches borrowers off guard. At a refinance closing you pay two sets of interest: accrued interest on the old loan from the first of the month through the payoff date, plus prepaid interest on the new loan from the funding date through the end of the month.
Fund the refinance on January 15 and you owe 15 days of accrued interest on the old loan (January 1 through 15) and 17 days of prepaid interest on the new loan (January 15 through 31). Your first payment on the new mortgage is then due March 1, covering February. The combined interest at closing can come close to a full month of interest, so build that into your cash-to-close estimate.
Claiming It on Your Taxes
Interim interest paid at closing is generally deductible as home mortgage interest for the tax year in which you close, on the same terms as the rest of your mortgage interest. The loan must be secured by your main home or a second home, and total mortgage debt must fall within the applicable limit, currently $750,000 for most filers.3Internal Revenue Service. Publication 936, Home Mortgage Interest Deduction
One tracking detail matters here. Lenders are instructed to leave interim interest out of Box 1 on Form 1098, the annual mortgage interest statement they send you and the IRS.4Internal Revenue Service. Instructions for Form 1098 Mortgage Interest Statement So the amount reported on your 1098 will be lower than what you actually paid in mortgage interest for the year you closed. To claim the full deduction, hold onto your Closing Disclosure and add the prepaid interest figure to the 1098 total when you file.