A prepaid finance charge is a fee assessed on loans, typically mortgages, when the borrower wants to close before the start of a calendar month. The charge covers the period from the closing date to the first day of the next month and is calculated based on the number of calendar days involved. The charge is listed with other loan processing fees and is typically rolled over to the full loan amount, with only a portion required at closing. The total amount of the charge varies based on the number of days used to calculate the APR and the rate itself.
A prepaid finance charge is a type of charge assessed on loans, most commonly mortgages. Sometimes referred to as PFC, this type of fee is typically assessed when the borrower wants to close on a loan before the start of a calendar month. This fee is typically listed with all other loan processing fees used to determine what type of out-of-pocket expenses the borrower must pay at closing. It is important to note that most of the finance charge rolls over to the full loan amount and only a portion of the full amount is required to be presented at closing.
Since the prepaid finance charge relates to covering the period from the closing date to the first day of the next calendar month, the figures are normally calculated by identifying the number of calendar days involved. For example, if the closing date is the 15th of a month with 30 days, the total days to count would equal 15. Depending on how the APR is calculated, the APR is would divide by 365 or 360, giving an average daily rate. That average daily rate would be multiplied by the 15 days of the period, eventually arriving at the amount of the prepaid finance charge.
The amount of prepaid interest is typically provided in a breakdown of various costs associated with the closing process. This can often include other charges, and some have to do with various types of subscription fees or document preparation fees. Each type of fee or charge is listed as a separate line item, making it easy to determine how much of those closing costs are associated with each activity. In most cases, a significant amount of these closing costs are lumped together in the loan amount itself, which means the borrower does not have to present the full amount of the prepaid finance charge or other fees at closing. . Typically, the total amount required for closing is at the bottom of the closing cost list, and comes up to only a percentage of that total.
It is important to note that the total amount of the prepaid finance charge involved will vary from one loan situation to the next. The amount of the figure is influenced by the number of days used to calculate the APR, as well as the rate itself. In most real estate deals, a projected prepaid finance charge is disclosed early in negotiations, and can actually fluctuate quite a bit until closing. For the most part, shifts are resolved when final closing costs are presented to the buyer for consideration and will often be very close to the original estimates quoted early in the loan process.
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