What Are Prepaid Costs When Buying a Home?

Approximately 58 percent of home buyers save money for a down payment on their mortgage. The down payment, however, is only one component of the equation. Other expenses, such as prepaid costs, or prepaids, must also be considered. But how well do you know them? That entails not only asking more questions, but also the right questions. Let’s start with the basics and go over some answers to what are prepaid costs when buying a home.

What exactly are prepaid costs?

They are cash payments made to third-party participants in the process prior to any down payment. When you apply for a mortgage, your lender will outline these in a loan estimate document. It is critical to understand that these fees have nothing to do with your mortgage lender. Regardless of whether you sign a mortgage or not, these fees must be paid when you close on a home.

What is the distinction between pre-paid and closing costs?

The distinction can be perplexing, especially since they are both paid around the same time. Consider this: prepaids are simply payments made during the closing process, whereas closing costs are payments made for the services of closing on a mortgage. Closing services include those provided by attorneys and title companies, as well as document drafting and other services.

What are the most common prepaid costs?

Prepaid costs typically include homeowner’s insurance, mortgage insurance (if applicable), property taxes, and prepaid interest fees. Mortgage companies are required to provide you with an estimate of these costs up front. Remember that these are only estimates. Finally, you will select an insurance provider and, depending on local governance rules, you may have some tax flexibility. Even your mortgage interest rate will fluctuate depending on when you close the loan.

Are prepaids associated with escrow?

Almost every time you ask what are the prepaid costs when purchasing a home, an escrow account will be mentioned. But the key point here is that they are related, not identical. An escrow account is simply a bank account established by your mortgage lender to avoid risks and ensure that you do not fall behind or miss your required prepaid payments. At the beginning of each month, a portion of your total mortgage payment will be deducted to pay your insurance premiums and property taxes. When those bills come due, your lender will pay them directly from there.

Explanation of Prepaid Interest

Prepaid interest fees are included in your prepaid costs and can vary depending on when you close on your mortgage. This is due to the fact that the rate is prorated based on how long it took you to close. The closer you close to the end of the month, the less you’ll have to pay. The way to calculate your prepaid interest is first to take your annual interest rate and divide it by 365 days. Then multiply that figure by the amount of your mortgage. This will give you your daily cost, which you can then multiply by the number of days between signing your mortgage and making your first payment.

Understanding the big picture behind prepaid costs and all the minor details of buying a house puts you in command of your finances. That is why it is so important to speak with a mortgage broker who understands the entire real estate process. At Dovetail Mortgage, our team of mortgage brokers in Massachusetts and Florida will remove the stress from the loan experience with our personalized care and real time updates on the state of your loan. We are here to help provide harmony and simplicity. Learn more about our services by contacting us today!