What cost would the lender collect at closing that is owed in arrears?

The correct answer is mortgage interest because it is typically collected at closing for the period that has already passed, which means it is owed in arrears. When a borrower takes out a mortgage, the first payment is usually due on the first day of the month following the loan origination. Therefore, at closing, the lender will collect interest from the closing date to the end of that month. This is to account for the time the borrower is using the lender's funds before making their first official payment.

In contrast, discount points are upfront fees paid to reduce the interest rate on a loan but are not owed in arrears. Mortgage insurance is often required for loans with less than a 20% down payment and is charged as a premium or upfront fee, but it is not specifically tied to the timing of payments in relation to the closing date. Mortgage principal refers to the amount of money borrowed that is repaid over time, and it is not applicable in this context as something collected at closing. Thus, mortgage interest stands out as the cost that is clearly associated with the time period before the first scheduled payment.