Understanding the distinction between prepaid items and closing costs will help you better budget for these expenses and be prepared for when they come due. Put simply, prepaid items are upfront payments associated with ongoing costs of home ownership, while closing costs are one-time costs related to your home mortgage.
• Prepaid items include costs such as homeowners insurance, mortgage insurance and real estate taxes
• Closing costs include items such as appraisal costs, title insurance and credit report check fees
• The best way to prepare for prepaid items is to speak with your financial planner or mortgage broker to estimate these costs and help set a budget
• Your mortgage banker can provide you with a Closing Cost Worksheet or Good Faith Estimate, which can help you plan ahead for your closing costs
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Amy: When you meet with your lender, make sure you understand the distinction between prepaid items, and your closing costs.
Ja: Prepaid items are costs associated with owning a home. Not necessarily having to do with having a mortgage on the home.
Ryan: Your home owners insurance, your mortgage insurance and your real estate taxes. So those things will actually end up getting paid into an escrow, but they are set up for usually a six month or a twelve month balance depending on which loan we’re talking about.
Amy: The closing costs are the fees associated with the loan.
Ja: Such as, appraisal costs, credit report checks, things like that.
Ryan: I think one of the best ways for people to be prepared for prepaid items is talking with their loan officer, and also talking with the financial planner as well. So they can plan out a personal budget for themselves.
Ja: And in speaking with your loan officer or mortgage banker… once we have a property address, or even just knowing an area that you’re looking at, we can get an estimate of what your prepaid items might be. As far as closing costs are concerned… closing costs are pretty standard, so those are some flat numbers that we could provide to you on a closing cost worksheet or a good faith estimate, so that you have all the numbers in front of you and you can do some comparisons.