Purchasing a home is an exciting process, though it can be confusing, too. One of the aspects that can throw new homebuyers for a loop is closing.
Superficially, it seems simple. It is when you sign on the line and get your keys. But there is more to it than that. In addition to completing the necessary legal paperwork to transfer ownership of a property, buyers must also render payment for closing costs as well as prepaid costs. These prepaid costs are actually separate from traditional closing costs, which can create some confusion. I hope this article clears things up!
What Are Prepaid Closing Costs?
Prepaid closing costs are payments that are made at the time of closing. These costs are the responsibility of the buyer. They may also be called “prepaids” or “prepaid costs.”
Prepaids are recurring costs that you are required to pay upfront before taking ownership of a property. You will continue to pay many of those costs throughout your ownership of the property, though they may change over time.
Your prepaids may include payments for your homeowner’s insurance policy and mortgage insurance policy, property taxes, and interest payment on your mortgage. They are not included in the price of the home and cannot be rolled into your mortgage.
Aren’t Prepaid Costs Just Closing Costs?
No, prepaid costs are not closing costs. While prepaid expenses and closing costs can both be paid during your closing, prepaids are separate from your closing costs.
Prepaids can be viewed as getting a headstart on upcoming recurring payments that you will need to make as part of owning a home or property. Closing costs include various appraisal and title fees as well as your down payment so that you can originate your mortgage loan. You can learn more about closing costs in Florida from this blog post.
When Are Prepaid Closing Costs Due?
Prepaid closing costs must be paid at your closing. If you are unable to pay them, then the home purchase will not move forward. Before everything is signed, it will be necessary to provide your lender with a wire transfer covering your prepaids along with your other closing costs and fees. Otherwise, the process will be delayed, or the contract will be nullified.
How Much are Prepaid Closing Costs?
Prepaid closing costs vary depending on the amount of your mortgage, when you close, the property taxes in your area, and your homeowners and/or mortgage insurance policy.
Mortgage Interest Payments
Buyers must pay the mortgage interest that will accrue during the period between closing and their first mortgage payment.
This amount will differ based on the size of your mortgage, your interest rate, and your closing date. If your closing date is close to the end of the month, you will have a smaller payment than if it is closer to the beginning of the month. This is because more interest will accrue before your first mortgage payment is due.
Your mortgage lender will be able to provide more information about this to you. If you want to estimate this cost, you will need to know your total mortgage and interest rate to get a per-diem interest amount that you can then multiply by the number of days until your first mortgage payment.
If you opt to escrow your tax payments, you will also need to fund that escrow account with the appropriate amount to meet your property tax obligations.
Your mortgage lender will let you know what the expectation is for these payments. You may be required to put down a couple of months’ worth of tax payments to build a buffer in your escrow account. This helps build trust with your mortgage lender and helps ensure that come tax time, and you are prepared.
Homeowners and Mortgage Insurance Payments
You will also need to pay the principal for any insurance policies required by your mortgage lender, including homeowners insurance and flood insurance. If your down payment is less than 20%, you may also be required to pay mortgage insurance.
Depending on your mortgage terms, you may need to pay for more than one month of insurance during your closing. Clarify this with your lender, so there are no surprises. If you are required to pay for mortgage insurance, you may also want to discuss when you can apply to have that requirement removed from your mortgage. (This can generally occur once you have accrued enough equity to cover 20% of the cost of your home.)
These prepaid costs are in addition to other closing costs, including your down payment. When trying to determine how much you will need to save for these costs, speak to your mortgage lender. She or he will be able to provide you with a reasonable estimate of your expected costs so that you can prepare accordingly. Work with someone you trust, so you feel informed throughout the process. You will rely on her or him heavily!
Skip Surprises: Work With a Reputable Realtor
When you have a good team working with you, you can focus more on the joy and excitement of purchasing a home and a little less on the nitty-gritty. Your home buying team is more than just your Realtor, though. In addition to presenting you with potential properties I think you will like, I can also recommend other reliable Tampa professionals to help you throughout your home buying journey. As a Tampa native and experienced Realtor, I have made it a priority to get to know other industry professionals to always connect my clients with others who will support their goals.
I love helping new home buyers find their ideal properties and getting them to the finish line. It can be a confusing process, but you will feel comfortable and supported throughout with a great team.
Are you ready to start looking? Let’s talk about making your dream home a reality! Contact me today to get started.