What Are Prepaid Costs Associated With Buying a Home?
Prepaid costs are payments made before your down payment and during closing to secure your mortgage.
Written by Payton Ternus
Reviewed by Melanie Reiff
Prepaid costs are payments you make in advance of making your down payment in order to secure your mortgage. They are paid during closing, before your fees are due.
If you’re looking to buy a home, you probably know closing costs are part of the deal—but have you heard of prepaid costs? These are separate entities from closing costs and escrow that you’ll need to pay for your new home.
Buying a home is expensive and you don’t want extra costs coming up as a surprise—that’s why home and
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What are prepaid costs?
Prepaid costs are made before your down payment in order to secure your mortgage. You will pay prepaid costs at the closing of your mortgage, before your other fees are due.
There are lots of expenses associated with buying a home, but don’t worry—prepaid costs are not extra costs. Your prepaid costs can include:
- Insurance premiums
- Mortgage interest
- Property taxes
- An initial escrow deposit
These payments are placed in an escrow account for you to handle other mortgage-related expenses.
Prepaid costs vs. closing costs
Prepaid costs contribute to upfront mortgage expenses, like insurance and taxes. Closing costs, on the other hand, are associated with the origination and closing of your mortgage loan process. Typical closing costs include:
- Attorney fees
- Lender fees
- And paying title companies
What prepaid costs are included in mortgages?
Prepaid costs will increase how much money you’ll need at closing, but they will cost the same whether you have a mortgage lender or not.
Keep in mind that prepaid costs are also required regardless of having a mortgage or not. Let’s break down the common prepaid costs you can find in mortgages.
Prepaid mortgage interest
Prepaid mortgage interest is collected as a prepaid expense for your mortgage lender. The lender uses this payment in order to put it towards your first mortgage payment.
No matter what day of the month you close on your mortgage, your mortgage lender has at least 30 days to submit your information and issue your statement. However, the amount of interest may vary depending on the time of month you close. Closing at the end of the month means less interest accrued before the first mortgage payment.
Prepaid taxes and insurance
When it comes to prepaid insurance, your lender will usually collect 6 months or 1 year of homeowners insurance. Your mortgage lender will also collect prepaid property taxes from you.
The exact dollar amount collected from you is determined by your lender, and the payment is then put in an escrow account for extra cushion when you need to pay bills.
Initial escrow payment
The final prepaid cost included with your mortgage is the initial escrow deposit. This payment is the money you deposit with your mortgage lender to be used for future property taxes and homeowners insurance premiums.
You may not even need this payment—check your lender’s requirements to calculate the cost of your deposit and see if you need it. If you do go with the escrow deposit, it will act as another cushion for future expenses. It will remain in the escrow account even after first payments as a precaution.
MORE: 10 questions to ask a real estate agent when buying a house
Where are prepaid costs outlined in my documents?
In your loan estimate documents, you can typically find your prepaid costs on page 2. They are usually labeled as “other costs” and listed after the outlined closing costs.
If you’re looking for the prepaid costs in your mortgage disclosure, they’ll be in a different place. You’ll find the prepaid costs listed as “prepaids” in Section F, and “Initial Escrow Payment at Closing” in Section G.
How do you compare prepaid costs during mortgage shopping?
When you compare loan offers, you may notice that prepaid costs are different in the loan estimate documents. Lenders can only make estimates when it comes to prepaid costs, so don’t focus on these—focus on things like fees, terms, and interest rates. If you want to try to calculate closing costs, look at the specific property tax records for your city and county.
How to save money on home insurance
Buying a home is a major (and expensive!) decision to make in your life. One part you can save money on is your homeowners insurance.
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MORE: How to compare home insurance quotes
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What are the common prepaid costs I should expect to pay?
Common prepaid costs include mortgage interest, insurance premiums, and property taxes.
How are prepaid costs and closing costs different?
Closing costs are typically associated with the process of originating and closing on a mortgage. They include fees like closing attorneys and title companies, while prepaid costs cover mortgage interest, insurance, and taxes.
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