What is the Difference Between Prepaids and Closing Costs?
In the world of financing your home purchase, there are a lot of different terms that may seem like a completely different language altogether. Two of those terms that may sound similar but have you questioning what they mean are the terms closing costs and prepaid. Sometimes it can become even more confusing as the terms can be interchanged in reference to what you need to pay upon signing final documents.
Here’s a little more information and insight into the difference between prepaid’s and closing costs on a mortgage
These are upfront cash payments made by the mortgage borrower at the time of closing to cover mortgage expenses before they are due. These expenses can include homeowners’ insurance, mortgage interest, initial escrow deposits, and property taxes.
These will be expenses included in the monthly cost of homeownership of your mortgage. Often times the lender will put these funds into an escrow account to be used to pay bills when they are due.
An explanation of each type of prepaid cost
Typically, at closing the mortgage lender will collect 6 to 12 months’ worth of homeowners insurance premiums. They pay these out to the insurer and most often will require a borrower to seek their own personal homeowner’s insurance policy to qualify for a mortgage.
Mortgage lenders estimate how much property tax you will owe upon purchase of the property and will most often ask for two months’ worth of property tax upfront as part of the closing procedure to help build a reserve for when property tax payments are due. Property tax money will go into an initial escrow deposit and from the escrow account, the lender will make the property tax payment on your behalf to the government.
Depending upon the day that you close during the month and if you close on any other day than the first your mortgage lender will collect prepaid mortgage interest. This will be placed into the escrow account to be applied to the first mortgage payment which will be due the following first day of the month after signing paperwork.
This amount is calculated from the date of closing to the end of the month. It is called a per day or per diem interest cost on the loan that is multiplied by the number of days left in the month. A little tip to paying less for this fee is to close closer to the end of the month.
Initial escrow deposit
This helps to create a cushion in the escrow account it usually is made up of two months of homeowners insurance payments above the premium you are charged at closing. Two months of property taxes are also combined with this deposit. It is another expense charged to help ensure the money is available when the bill needs to be paid.
A breakdown of closing costs
Prepaid’s are upfront costs paid in advance just as the name implies and they cover all the costs talked about above. Closing costs are fees paid to the lender and any third parties helping with the finalization of the home sale to close on the loan. You will see a closing disclosure document included in your mortgage paperwork to help you understand the breakdown of these costs.
The most common closing costs include any attorney’s fees, title company fees, title insurance, real estate commissions paid to real estate agents, appraisal fees, and any other government fees and taxes to help record the property sale.
Some of these costs can be negotiated but some are concrete and set in stone. For example, you will be required to pay current property tax rates with no adjustment. Later on in homeownership if your home is appraised by the local government and you do not agree with the new value assessment you can discuss it and ask about the possibilities of a better assessment for tax purposes. This is because property tax responsibilities are determined by the fair market value of your home.
It’s always a good idea to make sure you are well aware of these costs and exactly how much you are paying into them and if there’s a possibility for negotiating a little bit better price.
For more information on purchasing a home in Saint George and surrounding areas please contact me any time.
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