If the buyer is assuming an existing loan on the property, which of the following is prorated at closing?

In the context of real estate transactions, when a buyer assumes an existing loan on a property, prorations at closing typically involve the interest on that loan. This is because interest is charged on a daily basis up to the day of closing, and it is important to calculate how much interest is owed by the seller up to that point and how much the buyer will be responsible for afterward.

When a property is sold and the buyer assumes the existing mortgage, the loan remains in place, and therefore, the interest that accrues daily on the mortgage until the closing date needs to be prorated. The seller is responsible for the interest accrued up to the date of the closing, while the buyer will begin to incur the interest from the closing date onward.

Principal payments, on the other hand, are typically fixed amounts that are not prorated at closing. The principal balance of the loan remains the same until the first payment is made after closing. Therefore, in this scenario, only the interest component of the loan is prorated to ensure an accurate financial transition between the seller and the buyer during the closing process.

Understanding this allows buyers and sellers to better grasp their financial responsibilities during the closing process and ensures that both parties are treated fairly.