Assumed Mortgage Interest Proration for the Real Estate Investor
Real estate investors, if it's financially beneficial, can assume an existing mortgage from the seller when acquiring an investment property. When this is done, there is a proration required for the assumed mortgage interest.
As mortgage interest is paid in arrears, the seller will owe the buyer for interest "to or through" the closing date, as the buyer will be paying that interest on the next payment after closing.
As with most prorations, we'll need to know from the purchase agreement whether we'll be prorating to or through closing.
1. Calculate the days of interest the seller owes the buyer. 2. Determine the amount per day of the interest. 3. Multiply the number of days by the amount/day for total.
Let's do a sample proration. A real estate investor is closing on a rental property on the 16th of July. The mortgage balance is $257,505, with interest rate of 6.75%, and we're using a 365 day calendar year. We'll be prorating "through" the day of closing. This means that the seller is paying for the day of closing interest.
1. Days seller owes to buyer is 16 for July 1 through 16. 2. $257,505 X .0675 = $17381.59 divided by 365 days = $47.62/day 3. $47.62/day interest X 16 days = $761.92 from Seller to Buyer
This would be a DEBIT to the Seller and a CREDIT to the Buyer.
As mortgage interest is paid in arrears, the seller will owe the buyer for interest "to or through" the closing date, as the buyer will be paying that interest on the next payment after closing.
As with most prorations, we'll need to know from the purchase agreement whether we'll be prorating to or through closing.
Let's do a sample proration. A real estate investor is closing on a rental property on the 16th of July. The mortgage balance is $257,505, with interest rate of 6.75%, and we're using a 365 day calendar year. We'll be prorating "through" the day of closing. This means that the seller is paying for the day of closing interest.
This would be a DEBIT to the Seller and a CREDIT to the Buyer.