After the application of a home loan, you will receive two documents, a loan estimate, and closing disclosure. On the surface, these documents are identical but they both serve slightly different purposes. Up Next: Expenses To Expect In The First Year Of Homeownership Here is what you need to know about the differences between these […]
What are Prepaid Items?
You know that after you have gotten a Kansas City mortgage, you will have to pay closing costs when the mortgage closes. However after you look at your statement, you notice that you seem to be paying more than closing costs. What are these additions?
Don’t panic! Simply put, prepaid items are future expenses related to the home that are paid in advance of the mortgage due date. They are also there to fund your escrow account and lower risks for both you and your lender.
Prepaid Items are Different from Closing Costs
It is important to remember that prepaid items are not closing costs. Unlike closing costs, prepaid items are related to the property itself, rather than the transaction that went into purchasing it. Prepaid items are not the cost of borrowing for your Kansas City mortgage and can include:
- Real estate taxes
- Mortgage interest
- Hazard insurance premiums
Prepaid Items are Paid in Advance of the Due Date
While closing costs are paid when you close on your mortgage, prepaid items are paid in advance of it. For example, mortgage interest is collected so your lender can use it to pay for the first payment of your Kansas City mortgage. By paying these additional amounts every month, your lender will pay for homeowners insurance or property taxes on your behalf out of an escrow account.
The escrow account will help protect the lender by making sure that necessary expenses are paid on time. If you did not pay expenses like property taxes off and you lose your home, the lender would have no collateral.
Know How to Identify Prepaid Items
Prepaid items are not called such on your statement. Rather, they are categorized as “Items Required by Lender to be Paid in Advance” and “Reserves Deposited with Lender.” Unlike prepaid items, closing costs are clearly labeled as such on your statement as a “charge.”
Knowing how to tell the difference between a closing cost and a prepaid item can help you shop for a Kansas City mortgage with lower rates. You will be able to compare rates between mortgages and determine which is best for you. If you are unsure, ask a mortgage lender for help.