What is a prepaid interest?

From a financial point of view, the interest is the amount paid for the use of money, usually the percentage of borrowed or borrowed money. Interest is paid arrears or after reality because it is not payable until money is used. Prepaid interest is the interest paid before due. One of the most common places where the prepaid interest is assessed is to obtain a mortgage with real estate. For example, if the loan is closed on October 15, the rental agent will hold the interest at 15 October to 31. October, which would normally be due in payment of November 1. However, new loans usually do not require payment of payment until the end of the first month, which would be 1 December in the above case. This gives the creditor the time to set up an account and start with the regulararly scheduled payments.

Another form of prepaid interest charged from some real estate transactions is referred to as discount points or fees for the origin of the loan.In fact, the points are paid in advance to exchange the rate or obtain a lower interest rate on the mortgage. These can be charged both for new purchases and refinanted mortgages and are based on the percentage of mortgage amounts. If the creditor charges three points for a mortgage of $ 100,000 (USD), he charges in a prepaid interest rate of $ 3,000.

However, the

person should be very cautious when they agree to pay the payouts. In the US, the average owner of the house is within five years or refinance. It is important to calculate the difference in the amount of interest, which would be paid from a loan without a discount rate, and compare it with the amount of interest that would be paid for the new rate plus the part paid in points.

Some countries such as Belgium, Denmark, Greece, Ireland, Italy, the Netherlands, Norway, Sweden, Switzerland and the United States allow deduction of income tax for individuals and businesses. Other jurisdictions, as well as the United Kingdom, only allow a deduction of interest on the mortgage forbusinesses. In general, however, deduction does not include prepaid interest, but only the interest that was to be charged for the normal year. The prepaid interest will be deductible in the year when it was to be assessed.

The United States Tax Act is one exception to dealing with prepaid interest in the form of discount points paid for the mortgage for securing a personal residence. If it is an initial purchase, then the taxpayer has the opportunity to claim all points paid in the year of purchase or amortize points throughout the life of the mortgage or until the mortgage is paid.