What are Pre-Paid Closing Costs?

Pre-paid costs when buying a home are the expenses you pay upfront at closing. While the exact amount will vary depending on your loan and property location, pre-paid costs typically include homeowners insurance, property taxes, mortgage interest and an initial escrow deposit. If you live in a community with a homeowner association, they may also include HOA dues.

Here is a list of pre-paid costs and their definitions

Initial escrow deposit: A mortgage escrow account, also called an impound or trust account, allows borrowers to manage the costs associated with owning a home. If you have an escrow account, your monthly mortgage payment includes part of your expected property tax bill and hazard insurance premium. This ensures that when each payment is due, there are funds in your account to cover them. The advantage of an escrow account is that it allows you to spread out your tax and insurance bills into monthly installments rather than worrying about paying a large sum annually. An initial escrow deposit is what you’ll pay at closing to start your escrow account if one is required.

Homeowners insurance: When you take out a home loan, you must carry homeowners insurance to protect your property against losses and damage. Homeowners insurance is also sometimes referred to as “hazard insurance.”
You get to choose your insurance company. The Consumer Financial Protection Bureau recommends you “comparison shop to find the insurance policy you want and to learn if the amount the lender estimated is accurate for your specific situation.” Expect to pay the first six to 12 months of homeowners insurance premiums at or before closing, plus two- or three-months’ payments in advance to set up an escrow account.

Pre-paid interest: Interest paid in advance is known as pre-paid interest. When you close, this charge covers the cost of borrowing money between the date your home sale closes and the first day covered by your first monthly mortgage payment.

Real estate property taxes: Property taxes on real estate are used to pay for public services like roads, schools and libraries. When homeownership transfers to you, so does the responsibility for paying property taxes. If the seller pre-paid the entire year of property taxes, you’ll likely need to pay a prorated portion for the remainder of the year.

mortgage loan estimate (LE) is a complimentary service that that mortgage lenders often provide, giving you an idea of what to expect if you decide to move forward with your home loan. You’ll typically find a list of pre-paid costs in your LE along with your loan amount, the interest rate, APR, closing costs and a ballpark figure of your monthly mortgage payment.

Have questions? We're happy to help, including connecting you with an experienced mortgage expert.

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