Prepaid costs are paid when you close on the house. They can be divided into two categories: initial escrow payment and overall prepaid cost. These costs are used to offset closing costs for both buyers and sellers.
Two types of closing costs
There are two types of closing costs:
- The initial escrow payment is an initial amount given to the seller at closing that isn’t an additional cost. It's often used as a way for sellers to get more money from their property before they sell it.
- Prepaids are expenses that you pay in advance, like taxes and insurance, which also come out of your closing budget. They're both prepaid costs.
Prepaid costs are paid when you close on the house
Prepaid costs are paid when you close on the house. They’re the same for both buyer and seller, but they do not include part of your down payment. A few examples of prepaid costs include:
- Escrow fees
- Title insurance premiums
- Survey fees (if required)
What are prepaid cost when buying a home?
An initial escrow payment is an initial amount given to the seller at closing that isn't an additional cost. The seller has already agreed to pay it, and they're not receiving any money from you in exchange for doing so. This is why it's called a prepaid cost.
The initial escrow payment is made up of several different fees that are due upfront before your loan even closes, including property taxes and hazard insurance premiums.
However, there may be other prepaid costs as well (like homeowners association dues), depending on where you live and what kind of house you're buying—the main point here being that this amount isn't something extra you need to come up with yourself later on down the line; it's part of your closing costs right now!
Total prepaid cost for homebuyer
The total prepaid cost for the homebuyer is the sum of all prepaid costs. This includes the initial escrow payment and any other prepaid costs, such as points. The total prepaid cost for the homebuyer is deducted from their purchase price at closing.
Total initial escrow payment for seller
Seller's total escrow payment is the seller's contribution towards closing costs and prepaid items. The seller may pay for any of the following:
- Closing costs (such as title insurance, appraisal fees, etc.)
- Prepaids (insurance premiums, taxes or utility deposits)
- Taxes on sale proceeds that are paid by the buyer of a property
In addition to this initial escrow deposit amount paid by the seller at closing time, there is also an additional amount due at time of settlement called "closing cost adjustments." These are amounts added back into an escrow account once everything has been finalized. This can include things like additional repairs needed on a home being purchased.
Difference between escrow and prepaid
Know the difference between initial escrow, overall prepay and prepaid cost when buying a home. The initial escrow payment is an initial amount given to the seller at closing that isn't an additional cost. It's not part of your down payment or closing costs (though it usually is included in those figures).
Understand home buying costs before decision
In the end, it's important to understand the difference between prepaid costs and initial escrow. Knowing what you're paying for is crucial when buying a home, because it can help you budget appropriately and make sure you don't overspend on closing costs.
When it comes down to it though, these are both just ways of saying "payment made at closing." The best way to avoid confusion is by asking questions early on in your homebuying process so that any confusion dissipates before it becomes an issue during closing!