Overview

When you refinance mid‑month, lenders collect prepaid interest at closing to cover interest that accrues from the closing date through the last day of that month. That prorated amount is a standard closing cost and is calculated as a daily interest charge times the number of days remaining in the month. Understanding this figure helps you plan cash‑to‑close and evaluate whether the refinance still makes economic sense.

How prorating is calculated

  • Step 1 — Confirm the interest rate and starting principal: the new loan balance and note rate on your Loan Estimate/Closing Disclosure. (Check the Loan Estimate or Closing Disclosure — these are regulated forms that show estimated prepaid interest and other charges; see Consumer Financial Protection Bureau.)
  • Step 2 — Determine the lender’s day count: most consumer mortgages use a 365‑day year for daily interest, but some lenders or loan products may use a 360‑day basis. Confirm with your lender.
  • Step 3 — Compute daily interest: (loan balance × annual rate) ÷ 365 (or ÷ 360).
  • Step 4 — Multiply daily interest by remaining days in month to get payable prepaid interest at closing.

Example (typical residential refinance)

  • Loan balance: $200,000
  • Annual rate: 5.00%
  • Closing date: 15th of a 30‑day month (15 days remain)
  • Daily interest: ($200,000 × 0.05) ÷ 365 = $27.40
  • Prepaid interest: $27.40 × 15 = $411.00

Practical notes and timing

  • Closing near month‑end minimizes prepaid interest. If you close on the last calendar day you usually owe only 1 day of prepaid interest.
  • Paying prepaid interest at closing often means your first scheduled mortgage payment is not due until the next full month’s billing cycle; check the payment schedule in your Note and Closing Disclosure since practices vary by servicer.
  • Lenders must disclose estimated prepaid interest on the Loan Estimate and the final amount on the Closing Disclosure, so compare those documents before closing (Consumer Financial Protection Bureau).

Who is affected

  • Any homeowner refinancing a mortgage mid‑month will typically face prorated prepaid interest. It appears in the cash‑to‑close line and increases the funds you must bring to the table.

Common mistakes I see in practice

  • Relying on a single number without checking day‑count conventions (360 vs 365) — this can change the figure slightly.
  • Assuming prepaid interest can be financed into the loan — generally it must be paid at closing and is not rolled into the new principal.
  • Forgetting to read the Closing Disclosure: the final prepaid interest amount appears there and can differ from the Loan Estimate by allowable tolerances.

Strategy tips to reduce the hit

  • Time your closing: schedule closing as close to month‑end as practical to reduce days of prepaid interest.
  • Ask the lender for the exact daily interest calculation and the expected number of prepaid days so you can budget accurately.
  • Compare loan scenarios: sometimes slightly higher prepaid interest is offset by a lower rate or lower monthly payment — run a break‑even analysis before deciding. See our guides on refinance closing costs and how closing costs change when you refinance for more context.

Short FAQ

  • What if I close on the last day of the month? You’ll usually owe 1 day of prepaid interest; your first regular payment date will typically fall in the next billing cycle. Always confirm the payment schedule with your lender.
  • Can prepaid interest be financed into the loan? Usually no — prepaid interest is charged at closing and shown as part of cash‑to‑close. If a lender offers to add it to principal, read the loan documents carefully and understand the long‑term cost.

Tax note

Prepaid interest is generally treated as mortgage interest and may be deductible in the year you paid it if you itemize deductions. Tax rules change, so consult IRS guidance or a tax advisor for specific treatment in your situation.

Internal resources

Author’s note and disclaimer

In my 15+ years in lending I’ve helped many borrowers time closings to limit prepaid interest and make cash‑to‑close manageable. This article is educational only and not personalized financial or tax advice. For guidance tailored to your loan and tax situation, consult your lender and a qualified tax professional.

Sources

  • Consumer Financial Protection Bureau (CFPB) — Loan Estimate & Closing Disclosure information: https://www.consumerfinance.gov
  • IRS — mortgage interest rules (consult current IRS guidance)