We're talking about what are prepaid costs when you're buying a home. Closing costs, prepaid costs, and everything that goes into the cost and fees of getting a home loan can be confusing. So we're going to break it down prepaid costs are so you can have a better understanding moving forward when you look at these loan estimates.
So first of all, let's talk about what prepaid costs are. They are the costs related to purchasing the home and not due to the transaction. So it can be a little confusing.
It relates to the house, not the transaction, meaning that whether you have a loan or not, you're going to have prepaid costs. So these are the costs that are associated with getting real estate, no matter for using a mortgage or you're paying with cash.
So prepaid are directly connected to the property. Closing costs are directly attached to the mortgage. So getting a mortgage, getting a home loan is going to require fees. Getting a home is going to require fees. So we can put those two together. We have prepaid and closing costs. So basically what we're saying here is it's if, no matter if you have a loan or not, you're going to have prepaid costs here. So there are two ways that this is broken up on your closing disclosure.
The closing disclosure is the disclosure given to you by your lender. That's going to detail all the costs of your loan. It's going to be broken up into a loan car. Which would be closing costs and other costs, which would be your prepaid items. Loan costs are directly attached to the loan. Other costs are directly attached to the property.
So let's talk about some different types of prepaid costs we have here.
So if you're getting a mortgage, you need to pay that first year upfront. If you're paying with cash, you don't have to pay a full year upfront. But it might be a good idea to do so 12 months of homeowner's insurance paid upfront, you also have a prepaid interest.
Prepaid interest is from the time of closing until the end of the month. So that's because mortgage interest accrues during that time and mortgage payments are paid in arrears. So you can kind of "quote-unquote" skip that first payment, but you paid interest from the time of closing until you're up until the end of the month.
So this would be, if you have maybe a semi-annual tax payment coming up, let's say it's due July 1st and it's you're closing on June 30th. That bill is going to come up when you're the owner of the property. So you're going to get a tax bill for that.
Normally you're going to get what's called a proration credit from the seller if you are having to pay an upcoming tax bill.
For the time when you weren't on the property, also, you have HOA dues. So this is going to be dependent on if the home you're buying is in an HOA. If it is then you have HOA dues and that's set by the HOA, and if not then, great, you don't have an HOA.
Something else to watch out for with HOA is sometimes you have to pay for it to get the documents from the HOA. And that can be really costly sometimes. Sometimes these HOA companies really gouge you on costs. I've seen sometimes we're getting information from an HOA is 200, 300, $400. That can be a little crazy.
So recording fees are things like that the local government would charge to record the deed and the mortgage. They might have some taxes that go along with that as well. But they're going to get paid to be able to pull the deed together on an online website and actually record it.
You also have transfer taxes. This is not in all states, but some states have transfer taxes that are paid by the buyer. Meaning that when property transfers ownership, somebody has to pay the taxes on that property. Usually it's a seller sometimes it's the buyer. So something to watch for.
Then escrow is basically where you have taxes and insurance paid by the lender. It means taxes and insurance are put into the monthly mortgage payment for you. Then there's an account set up. What's called an escrow account and it's a couple of months of insurance and taxes. In that cushion is there just because in case you're ever behind on a payment that taxes and insurance are always current.
So out of all these, the main one that you can negotiate is your homeowner's insurance, and that's because you get to shop for your homeowner's insurance. So this should give you a really solid idea here of what your prepaid costs are when you're purchasing a home.
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