How is prepaid interest treated in a real estate transaction?

In a real estate transaction, prepaid interest is treated as a credit to the buyer because it represents interest that has been paid in advance for the period prior to the buyer taking ownership of the property. When a buyer closes on a property, they often assume the loan that requires monthly interest payments. If there are days before the first full mortgage payment is due, the buyer needs to reimburse the seller for that prepaid interest related to those days.

This reimbursement is acknowledged as a credit on the buyer's side of the closing statement because the seller has already paid that expense, and the buyer will be responsible for making future interest payments. Therefore, recognizing this prepaid interest as a credit ensures that the buyer does not end up paying that amount twice.

The other options do not accurately reflect how prepaid interest is typically handled in real estate transactions: it is not solely a debit to the seller, prorated between the buyer and seller, or a straightforward payment made at closing without considering its credit nature for the buyer.