Closing Costs and Pre-Paids

If you’re like most folks who purchase a home there are some terms in the mortgage and closing process that are unfamiliar to you. Two important terms are Closing Costs and Pre-Paid items. Some people may use these terms collectively, however, it's important for you to know there is a distinction between the two.

For buyers, Closing Costs and Pre-Paid items are in addition to any down payment you need to bring to closing and will equal approximately 3-4% of the purchase price of the property (if you’re paying via a mortgage).

NOTE:  Pre-Paid items do not apply to Sellers.  Seller Closing Costs will equal approximately 2% of the contract price, plus Realtor fees.

CLOSING COSTS – Those charges to be paid by you at closing (in addition to your downpayment) which are paid as a result of purchasing, selling, or refinancing property. These may include:

• Appraisal Fee
• Various Certifications (flood, Bond, ect)
• Title Service
• Title/Closing Office Fee
• Title Insurance
• Deed and Mortgage Recording Fees
• Taxes on the Sale/Purchase of the property
• Lender Fees
• Credit Report
• Tax Service Fee – The fee your lender will charge you to set up an escrow account for your mortgage.
• VA Funding Fee (VA Loan) or Up Front Mortgage Insurance Premium (FHA Loan). Normally, you can roll these into your mortgage

Note: Those in bold will not apply if you are paying cash for the property.

PRE-PAID ITEMS –  If you’re paying via a mortgage, all lenders require you to set up an escrow account with them at closing. This escrow account is used to deposit funds from your monthly mortgage payment (PITI) so they may pay your annual homeowner's insurance and property taxes.

These do not apply if you are paying cash for the property. Cash buyers will be responsible for paying these items once per year to their homeowner's insurance company and county property tax office. 

Pre-Paids - Your lender will require you to have a certain balance in your escrow account throughout the life of the loan. Therefore, they will require you to pre-pay a portion of your annual costs for homeowner's insurance and property taxes, at closing, to initiate the escrow account so you don't start with a zero balance.

Keep in mind, this money that you’re paying in the form of Pre-Paids, is essentially you’re money. When you ultimately sell your property, you will have remaining funds in your escrow account that will be paid back to you a few weeks after closing.

Another form of Pre-Paid items is pre-paid mortgage interest. The day of closing your lender will wire funds to the title company to pay the initial mortgage loan amount. The title company turns those funds around to pay the seller (and/or their lender) to cover the contract price (minus any of their closing costs). Let’s say for example your closing date is July 6th. Your first mortgage payment will not be due to your lender until September 1st. Since the lender has already distributed (paid) funds for your purchase, at closing, they will charge you pre-paid interest from the day of closing until the date your first mortgage payment is due.

NOTE: Your monthly mortgage payment is comprised of (see separate email for an in-depth explaination):

• Principle (amount you’re paying down on your balance each month)
• Interest – the amount of interest you owe the lender each month based upon your remaining principle balance.
• Taxes – 1/12th of your annual Property Taxes
• Insurance – 1/12th of your homeowner’s insurance.

CLICK HERE – For the my report “21 Mortgage Terms You Must Know” for more information.

I hope that helps.   Let me know if you have any questions. 

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