Closing costs usually refer to fees mandated by mortgage companies and third parties. Pre-paid expenses and escrows are also included in closing settlement statements and are often mistakened as closing costs, although they are really a distinct category. Definition of pre-paid expenses and escrows for Florida mortgage closings is provided in this blog.
Pre-paids
Pre-paid expenses are fees due at closing but technically cover an upcoming time frame. Common pre-paid charges are insurance and interest. Homeowners insurance has an annual premium that must be paid in advance. Some buyers pay the amount directly to the insurance company in advance of the closing, while others pay it at the closing. Interest is another pre-paid charge. Mortgage payments are normally paid in arrears, so they cover a past month. For example, if you purchase real estate January 15th, your first loan payment would be due on March 1st, and it applies to the February time frame. So there is no payment covering January 15th-31st. The interest for that period of time is charged at closing as pre-paid interest.
Escrows for Home Purchases
Escrows are payments held in a holding account, known as an escrow account, and disbursed when needed. They are set up to cover recurring items such as private mortgage insurance (PMI), real estate taxes, and homeowners insurance. Every month, included in the monthly mortgage payment, a certain amount is directed into the escrow account. When PMI, taxes, or insurance payments are required, the appropriate amount is withdrawn from the escrow account. This accomplishes two goals. First, it removes the hardship of home buyers having to save for the large bills. Secondly, the lender knows that the bills are paid, which protects their interest in the home. Escrows are not required by all lenders, but it is common for mortgages with small down payments.
Definition Of Pre-paid Expenses And Escrows For Florida Mortgage Closings
The cost of pre-paid expenses and escrows will vary based on the time of year or day of month. Closing near the end of a month will reduce pre-paid interest. Pre-paid taxes and escrows will depend on the location and when tax bills are due. If minimizing funds needed at closing is important, discuss the time lines with your real estate broker and mortgage advisor. For additional information or guidance on the above “Definition Of Pre-paid Expenses And Escrows For Florida Mortgage Closings”, you may contact Sonny Solomon at The Keyes Company via phone at 561-247-1047 or email at sonny@sonnysolomon.com.
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