What Is Interim Interest on a Mortgage?

Interim interest is a specific type of interest charged during the mortgage process. It covers a particular period, ensuring financial obligations between the borrower and the lender are accounted for from the moment loan funds are disbursed. Understanding this charge clarifies one of the initial financial components involved in securing a home loan.

Understanding Interim Interest

Interim interest accrues on a mortgage loan from the closing date up to the end of the current calendar month. Mortgage interest is commonly paid in arrears; a borrower’s monthly payment covers interest accumulated during the preceding month. For instance, a September 1st payment typically covers August’s interest. This necessitates an interim interest charge to cover the gap between the loan’s funding date and the start of the first full month of the mortgage payment cycle.

This charge ensures the lender receives interest for every day the loan amount is outstanding. If a loan closes mid-month, such as on the 15th, interim interest covers the period from the 15th through the 30th or 31st. Without this payment, the lender would not collect interest for those initial days the loan was active before the regular monthly billing cycle begins. It aligns interest collection with the standard full-month payment schedule that typically starts on the first day of a subsequent month.

Calculating Interim Interest

Interim interest is calculated based on a daily rate, often referred to as per diem interest. To determine this, the annual interest rate is converted into a daily rate by dividing it by 365 days, though some lenders may use a 360-day year.

The daily interest rate is then multiplied by the principal loan amount to find the daily interest charge. For example, a $300,000 loan with a 4.5% annual rate yields approximately $36.99 per day (0.045 / 365 $300,000). This daily charge is then multiplied by the number of days remaining in the closing month, including the closing day. If closing occurred on the 15th of a 30-day month, the borrower pays for 16 days of interim interest.

Payment at Closing

Interim interest is a one-time charge paid at loan closing, included as part of overall closing costs. Borrowers can find this charge itemized on their Closing Disclosure (CD) or a similar settlement statement.

Paying this interest at closing bridges the financial period until the first full mortgage payment is due. For instance, if a loan closes in July, the first regular monthly mortgage payment would typically be due on September 1st. This payment would then cover the interest accrued during August. Interim interest is a standard and expected component of mortgage closing costs, ensuring a smooth transition into the regular payment schedule.