WTF are Prepaids?
On page 2 of the Loan Estimate, where it breaks down all the various costs and fees for your home loan, on the right side in Section F, there are prepaids.
There are a few things a lender will require you to pay in advance. What you would normally pay anyway in due time, the lender wants you to pay upfront so they are paid up to the next due date. These are mortgage interest, property taxes and homeowner’s insurance.
Let’s take prepaid interest first. This is essentially your first mortgage payment, paid in advance. Mortgage payments are paid in arrears — meaning you pay your March payment on April 1st. This is the only time you will pay interest in advance since the amount of interest you owe is calculated on the outstanding amount of the loan, it cannot be known until the billing cycle is done.
In order to get you on the billing cycle, you will prepay interest on the initial amount of the loan for the remaining days of the month in which you close. If you close on the 15th of July,you will pay 16 days of interest to take you through to the 31s of July. Then you will receive your August payment on September 1st.
This is how many say you skip a payment. It does feel like you do. You don’t skip a payment though, you wait until the billing cycle catches up.
