Accrued Interest

Accrued interest is interest that has been earned but not yet paid. On a mortgage note, interest accrues daily (or per the note's terms) on the outstanding principal between payment dates. By the time a payment is made, a month's worth of interest has accrued; if a payment is missed, interest keeps accruing on top of the unpaid balance. Accrued interest matters in two specific moments for note holders: when a loan is paid off and when a note is sold.

Accrued interest in a payoff

The payoff amount a borrower needs to satisfy a loan early is more than the unpaid principal balance. It equals the UPB plus accrued interest to the payoff date (often quoted as a per-diem amount), plus any late fees or costs. So a borrower refinancing on the 15th of the month owes principal plus roughly half a month of accrued interest. This is why the payoff is always higher than the principal balance alone — a distinction that surprises some sellers comparing offers.

Accrued interest at a note sale

When you sell a note, the closing typically prorates accrued interest as of the closing/transfer date, similar to how property taxes are prorated at a home sale:

• Interest that accrued while you owned the note (up to closing) belongs to you, the seller.
• Interest accruing after closing belongs to the buyer.

If the borrower's next payment lands shortly after closing, the settlement statement allocates the interest portion between buyer and seller for the days each held the note. This proration is usually a modest line item, but it ensures each party earns interest only for the period they actually owned the note. A clear amortization schedule and accurate records make the calculation simple.

Accrued interest on delinquent notes

For a non-performing note, accrued-but-unpaid interest can build up substantially over months of missed payments. While that accrual increases the nominal amount the borrower owes, a note buyer does not pay for it dollar-for-dollar — collectibility is uncertain, so the note is valued on the property and likely recovery, not on the accrued total. Inflated accrued interest on a defaulted loan rarely translates into a higher sale price.

What it means when you sell

Know the difference between your principal balance (the base for valuation) and the payoff (principal plus accrued interest and fees). Expect a small accrued-interest proration at closing in your favor for the period you owned the note. And do not assume large accrued interest on a delinquent note adds to your price — buyers price defaulted paper on recovery, not on accruals.