What You Need to Know About Prepaid Closing Costs

Few things beat closing day when buying a home – the thrill of getting the keys and knowing that you finally own your home! After getting pre-approved and elbowing your way through the market, you're just a few signatures away from becoming a homeowner. There's just one thing you may not have considered - prepaid closing costs.

What are prepaid closing costs?

Prepaid closing costs are payments made to third parties during the closing of your mortgage. They are not related to your lender, and the total fees will be communicated to you when you apply.

By contrast, your closing costs are what you pay for the services used to close on your loan. These are due at the time of closing.

To ensure that your path to homeownership isn't a bumpy one, here's a quick list of what prepaid mortgage costs you can expect to pay:

• Homeowners insurance premium
• Mortgage insurance premium (if applicable)
• Property taxes
• Prepaid interest & fees

Please remember that these estimates may ultimately change, depending on your municipal tax rate, insurance plans, and other factors. Regardless, I'll keep you informed so that you can make smarter choices along the way.

How is escrow related to this?

You may be curious how escrow impacts your prepaid closing costs. It's understandable, but remember that the two are not the same.

Here's a handy way to think about it:

• Escrow accounts are just bank accounts from your lender. They contain funds to cover the potential risk of you not paying your prepaid mortgage expenses.
• Prepaid mortgage costs are what you pay during the process to third parties.

If you have any questions about escrow or prepaid costs associated with closing your mortgage, reach out to me, and I'll walk you through it.

Don't forget about prepaid interest

Prepaid mortgage interest is a part of your prepaid closing costs, and is the amount of interest accumulated between closing day and the date of your first monthly mortgage payment. It is charged by your lender and is due at closing.

Mortgage payments cover the month you previously lived in your home. So, come October, you'll be paying September's mortgage payment.

That means that by the time you have reached your first payment, you would have owed interest for the previous month. Rather than tack this amount on to your first bill, this prepaid mortgage interest at closing reflects the month you will be living in your home.

Calculating your prepaid mortgage interest

Let's say that you closed on September 15, and your mortgage payment is due on the first of each month.

Since your monthly mortgage payments are backdated by a month, here's how your interest is calculated:

• Your first payment is due on October 15.
• A total of 15 days has passed with unpaid interest.
• These 15 days represent the interest you will pay as part of your prepaid mortgage interest at closing.

Remember, paying this interest upfront at closing makes it easier for you to begin paying your mortgage at a predictable amount from now on.

Bottom line

You've gotten this far, so it's smart to prepare for a smooth closing that isn't jeopardized by not having the required funds for prepaid closing costs. I recommend that you set money aside, especially if money is tight. In the meantime, give me a call and I’ll share easy-to-understand information and practical steps you can take to buy a home successfully. Ready to get started? Contact me to get moving!