No matter if you are refinancing an existing loan or starting new one entirely, you will always prepay interest. However, the amount of interest that you prepay depends on which date you would like to pay your first bill. Most people who have a loan prefer that the payment be due at the start of the month, while others prefer the middle. If there is a specific date that you prefer, it is a good idea to ask, as some lenders will allow you to choose the payment date.
How interest is paid
Interest is paid in arrears in America, which means that your monthly payments covers your principle and interest together.
Look at it this way: first, you have your bill of $499.55 due on November 1st. The balance of your loan is $99,000, with 6% interest for the length of thirty years. When you pay your bill for November 1st, you are actually making a payment for the October interest.
On the other hand, if your loan closed on September fifteenth , you will instead be prepaying the interest for September fifteenth through the thirty-first. While doing this may make it appear that you are getting forty-five days of your loan for free before you pay your first bill, you aren’t. This is because you need to pay fifteen days of interest before actually closing, and another thirty will be included with your first bill
How to compute your unpaid principle balance
Are curious as to what your unpaid principle loan balance is after paying your bill for the first time? Well, it’s simple to figure out. First, just multiply your principle loan balance against your annual interest rate. If your loan was $99,000 with a 6% rate of interest, your amount of interest for one year would be $4,000. Then, take this amount of interest and divide it by twelve months. In this example, the monthly interest rate would be $400.00.
So, continuing our example, your November 1st payment would be $499.55. In order to figure out the principle portion, just subtract the interest ($400) from the total, which would give you $99.55. This part of your overall payment is principle. Next, subtract this number from the portion paid of the unpaid principle balance ($99,000). You would get a number of $98,900.45, which is unpaid principle balance that is remaining as of November 1st. When paying off a loan, you will need to calculate and add interest everyday until the loan has been completely repaid.
If all of this seems overwhelming, just remember: with each payment, the portion of your balance that is unpaid principle; your principle balance payment will increase every month because the interest payment will be lower.
Conclusion
If you would like to know your remaining amount due after the January 1st payment, you’ll need to figure it with the new unpaid balance. So, to figure this simply take $98,900.45 and multiply it by your 6% interest rate, which will equal $4,994.03. Then, divide this by twelve months, and you’ll get $499.50, which is the interest portion that is due. So finally, your unpaid balance in December is $98,900.45, which is what you will take the January 1st payment of 100.05 from, making your newest unpaid principle balance $98,800.40.