If you’ve tried our Closing Costs Calculator, you probably noticed a section called “prepaids.”
So what’s a prepaid?
A prepaid is an amount of money required by a lender at your closing in order to pay certain items in advance. Prepaids are expenses the home buyer pays at closing before they are technically due. Prepaids are normally required when a borrower puts down less than 20 percent.
Prepaids may include:
- Taxes
- Accrued interest
- Interim interest
- Mortgage insurance premiums
- Hazard insurance premiums
- Special assessments
- Association dues
Why are prepaids required?
Oftentimes a lender will require prepaids to fund an account (held in escrow). The lender holds onto that money and then pays certain bills on behalf of the borrower. Prepaids lower the lender’s risk because they can ensure that the home is protected. (For example, if insurance premiums were not paid, the home could be destroyed and the lender would have no collateral.)
Try our Closing Costs Calculator to see what your expected prepaid amount could be, depending on the cost of your house and your expected down payment. Keep in mind, your expected down payment might differ based on your credit score and other factors.