BUYERS – OFTEN OVERLOOKED CLOSING COST
Often buyers forget they will need money to cover closing costs in addition to the actual sale price of their home. And when calculating the TOTAL amount of money you will need at closing – prepaid expenses are often left out. Many times these are overlooked because they are not really a true closing cost per se. They are expenses that would normally be incurred anyway as part of the on-going expenses of home ownership – except that lenders want them prepaid at the closing table – thus the term “Prepaid Expenses” or simply “Prepaids”.
These most commonly include property taxes, homeowner’s insurance and interest.
Property taxes are normally handled by the Seller giving the Buyer a credit for their time spent owning the property. At the end of the year – the Buyer gets the entire bill, but has been reimbursed for the time during the year the Seller had possession. This would result in a net gain to the Buyer at Closing. However, most lenders today want at least 4 or more months of the property taxes paid upfront – which could easily turn the credit into a debit depending upon when the sale occurs. This prepaid property tax is in addition to having any taxes paid with the mortgage payment.
A homeowner’s policy is another prepaid expense. A buyer would incur this expense anyway – but lender’s want the entire premium annual premium up front. In some cases, they may want a few more months of premium as well.
Finally – prepaid interest is charged when the closing date doesn’t fall on the first of a month – which is nearly all closings. This is because lenders don’t want to have to keep track of various due dates with every borrower. So – the borrower pays interest in advance to “true up” and make the payments going forward due on the first of each month.
Often Prepaids can end up being more than some of the actual closing costs – so left unaccounted for in your planning can render you incapable of buying the home you thought you could afford. The best way to avoid this of course is to make sure you account for them before you start your search.
