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Why You Need to Know About Pre-Paid Closing Costs

When you're closing on a home loan, you'll likely encounter some upfront costs beyond your down payment. These are called closing costs.

These will all be explained in a document called a Closing Disclosure, which lenders are required to provide to you when you close a loan.

Some of the closing costs can be rolled into your mortgage, however there are some closing costs that you will need to pay to close on your loan. Some of these will fall under the pre-paid category, meaning you are paying for the item in question before it’s due.

Why is that the case?

In some cases, you may have to pre-pay some of your property taxes. You may also have to pay for some of the mortgage interest from the date of the loan closing through the end of the month (if you closed either at the beginning or in the middle of the month).

Additionally, you may need to cover a portion (or all) of your homeowners’ insurance dues.

“The reason why is because insurance is paid before the fact,” said Sergio Montalvo, sales trainer at New American Funding.

“So, you pay for the policy for the year that you're going to live in it,” Montalvo added. “And the insurance payments that you're making on your mortgage payment is so that when the policy comes due, we have sufficient amount of monies in your impound account, also known as your escrow account, so that we can pay that policy again.”