When do you have to pay prepaid interest on a mortgage?

The correct understanding of when you have to pay prepaid interest on a mortgage is during the closing process, specifically at the closing table. This is because prepaid interest represents the interest that accrues on your mortgage loan from the date of closing until the beginning of the first full month of your mortgage payments.

When you close on a mortgage, the lender charges interest for the days between the closing date and the end of that month. If your first payment is scheduled for more than a month away, you would have already incurred that prepaid interest at the time of closing. Therefore, it is paid upfront as part of the costs associated with obtaining your mortgage.

This payment is a standard practice in mortgage financing and ensures that the lender receives the interest for the period before the borrower begins making regular monthly payments. Understanding this concept is important for managing the upfront costs associated with obtaining a mortgage loan.