What are prepaids in real estate? The easiest answer is that prepaids are the additional costs that one pays on the closing date of a property. These funds are stored in an escrow account and used to pay for items such as insurance premiums, property tax payments, or an insurance agent for your policy. These fees are not the same as closing costs. Prepaid cost are only for home buyers who take a home loan.
Closing Cost vs. Prepaids
A closing close is a fee that is paid to lenders, title company, and third parties for processing and closing a loan. These fees usually include such items as appraise fees, attorney fees, title company fees to the title companies, appraisal fee, title insurance, application fee and real estate agent commissions. Prepaid items on the other hand are the fees you have to pay as the upfront cost such as the insurance premium, initial escrow payment, real estate taxes. The down payment does not count as either of these and is a separate amount owned as a portion of the loan.
Prepaid costs are non-negotiable. If you put over 20% down, then you can waive the escrow account but then you will be responsible for payments of taxes and insurance on your own and will need to track how much money you need to set aside for the end of they year. A mortgage however can be negotiated and you can shop for better rates on the total loan amount so you pay less for the amount of interest over time.
What is An Escrow Account
An escrow account is the account which the lender will hold the funds to pay taxes and insurance on behalf of the new home owner. An estimate will be made the beginning of the year and the mortgage lender will make the payments for you in addition to the monthly payments on your mortgage loan in addition to your mortgage payments and mortgage interest. Your lender will provide you with a good faith estimate document with your closing disclosure on how much is needed to cover your tax bill and to pay your insurance company. This amount will be collected and deposited via the initial escrow deposit. This amount will be updated yearly and any overage will be refunded to you and under payments will be added to you following years payments.
Prepaids in Commercial Real Estate
Purchasing commercial real estate has many parallels to a home purchase but there are more options on lenders. There will be origination fees, brokerage fees, and title insurance but also many more additional fees costs such zoning reports, engineering reports, appraisals and various legal fees.
Conclusion
It is important to know the difference between what are Prepaids in Real Estate and what are closing costs when buying your property to know what to expect when you close the deal and when you get your first payment at the end of the month. Having enough money to cover the upfront costs and the purchase price is just a part of the equation of the funds you will need to have on hand. Be sure to consult with a real estate professional and lender to make sure there are no surprises at the time of closing.
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