Prepaid Interest

The term prepaid interest refers to any interest paid by the borrower before the due date. A common use of this term is for the interest a borrower pays at the time of their mortgage closing. That interest is for the period between the date of closing and the date when the first mortgage payment is due. It keeps that interest from accruing against the loan. One type of prepaid interest found in many mortgage loans is points. Points are a specific amount of interest collected at the time of closing. This prepaid interest helps to bring down the final interest rate on the mortgage loan. In terms of taxation, this prepaid interest is often expensed over the entire life of the loan. However, the IRS will allow a borrower to deduct it in a single year, providing they meet certain criteria.