Prepaid Interest - Prepaid interest is interest that is paid in advance of when it is actually incurred. This can include things like interest that is paid at the closing of a mortgage loan, or interest that is paid in advance as part of a loan refinance. Prepaid interest can also be used to lower the interest rate on a loan, or to pay down the loan balance more quickly. It's important to note that prepaid interest is not tax-deductible, unlike regular mortgage interest.