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A prepaid finance charge is a type of charge that is assessed on loans, most commonly mortgages. Sometimes referred to as a PFC, this type of charge is normally assessed when the debtor wishes to close a loan before the beginning of a calendar month. This charge is normally listed with all the other loan processing fees that are used to determine what type of out of pocket expenses the debtor must pay at the time of closing. It is important to note that most of the finance charge is rolled into the total amount of the loan and only a portion of the total amount must be tendered at closing.
Since the prepaid finance charge has to do with covering the period from the date of closing until the first day of the upcoming calendar month, the figures is normally calculated by identifying the number of calendar days involved. For example, if the closing date is on the 15th of a month with 30 days, the total days to take into account would amount to 15. Depending on how the annual percentage rate of APR is calculated, the annual interest rate would be divided by 365 or 360, providing an average daily rate. That average daily rate would then be multiplied by the 15 days for the period, finally arriving at the amount of the prepaid finance charge.
The amount of prepaid interest is normally provided in a breakdown of various costs associated with the closing process. This can often include other charges, with some having to do with various types of underwriting fees or document preparation fees. Each type of fee or charged 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 actually bundled into the loan amount itself, meaning that the debtor does not have to tender the total amount of the prepaid finance charge or other fees at the time of closing. Typically, the total amount that is required for closing is found at the end of the listing of closing costs, and comes to only a percentage of that total.
It is important to note that the total amount of 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 annual percentage rate, as well as the rate itself. In most real estate deals, a projection of the prepaid finance charge is disclosed early on in the negotiations, and may actually fluctuate somewhat up to the time of closing. For the most part, the shifts are resolved by the time the final closing costs are presented to the buyer for his or her consideration and will often be very close to the original estimates quoted early on in the lending process.
While closing costs on loans are often rolled into the total loan, don't make the mistake of looking at those closing costs and understanding what they are. Some unethical types have been known to slip all sorts of charges in there and rely on the notion that most people don't pay close attention to what "closing costs" are supposed to be.
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