A prepaid finance charge is a type of fee charged on loans, most commonly mortgages. This type of charge is sometimes referred to as a PFC and is usually levied when the debtor wants to close 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 the time of closing. It is important to note that most of the financing costs are included in the total amount of the loan and only a portion of the total amount needs to be submitted at closing.
Since the prepaid finance charge is about covering the period from the closing date to the first day of the next calendar month, the figures are usually calculated based on the number of calendar days involved. For example, if the closing date is the 15. of a month is 30 days, the total number of days to consider would be 15. Depending on how the APR is calculated, the annual interest rate would be determined by . Divided 365 or 360, which gives you an average daily rate. This average daily rate would then be multiplied by the 15 days for the period to finally get the amount of the prepaid finance charge.
The amount of prepaid interest is usually indicated in a breakdown of the various costs associated with the closing process. This can often include other fees, with some having to do with various types of underwriting fees or document preparation fees. Each type of fee or charge is listed as a separate line item, so you can easily determine how much of that closing cost is associated with each activity. In most cases, a significant portion of these closing costs are actually bundled into the loan amount itself, so the borrower does not have to submit the total amount of the prepaid finance charge or other fees at the time of closing. Typically, the total amount required for closing is found at the end of the closing cost listing and is only a percentage of that total amount.
It is important to note that the total amount of the prepaid finance charge varies from one loan situation to the next. The amount is affected by the number of days used to calculate the APR, as well as the interest rate itself. In most real estate transactions, the prepayment of the down payment is disclosed early in the negotiations and can fluctuate somewhat until closing. The deferrals are mostly resolved when the final closing costs are presented to the buyer for review, and are often very close to the original estimates provided at the beginning of the lending process.