What Are Prepaid Costs When Buying A Home?
Author:
Emma TomsichMay 14, 2024
•6-minute read
When it comes to buying a new home, additional fees and costs always come with the transaction. Most home buyers expect to cover the down payment and closing costs but may not anticipate prepaid costs (or “prepaids”).
Lenders break down each cost in two key documents: the Loan Estimate and the Closing Disclosure. Borrowers receive a Loan Estimate from lenders 3 days after submitting a mortgage application and a Closing Disclosure from lenders at least 3 days before closing.
Buyers sometimes mistake prepaid costs for closing costs and escrow because they’re all paid at closing. To help you decipher which is which and guide you through each prepaid cost, we’ll explain what prepaid costs are when buying a home and offer tips on calculating prepaid costs before applying for a mortgage to help minimize surprises on closing day.
What Are Prepaid Costs?
While you pay prepaid costs at closing, they differ from closing costs.
Prepaid costs go toward future housing expenses, such as property taxes. Your lender typically collects a portion of your monthly mortgage payment and deposits it into an escrow account. When payments are due (usually once a year), your lender will withdraw funds from the escrow account to pay them.
Prepaid costs can include:
- Homeowners insurance premium
- Real estate property taxes
- Mortgage interest
- Initial escrow deposit