Prepaid items are expenses collected at closing that are not necessarily fees for obtaining the mortgage.
They are often grouped together with “closing costs,” but they are different from lender fees, title charges, and other transaction costs.
Common prepaid items may include:
- Homeowners insurance
- Prepaid mortgage interest
- Property taxes or tax adjustments
- HOA dues or fees
- Fuel or other property-related prorations
Homeowners Insurance
Lenders generally require homeowners insurance to be in place before closing.
The first year’s homeowners insurance premium is typically paid in full at or before closing.
If your mortgage includes an escrow account for taxes and insurance, the lender will also collect additional money at closing to begin funding that account. This commonly includes approximately 2–3 months of homeowners insurance, although the exact amount can vary.
Prepaid Mortgage Interest
Mortgage interest is paid in arrears, meaning your regular monthly mortgage payment pays the interest that accrued during the previous month.
At closing, you typically pay interest from the day you close through the end of that month.
This covers the interest that accrues before your regular monthly mortgage payments begin.
The exact amount of prepaid interest depends on:
- Your loan amount
- Your interest rate
- The date you close
Because of this, the amount of prepaid interest can change if your closing date changes.
Property Taxes
Property taxes at closing can generally involve two different things:
1. Property Tax Proration
Property taxes may need to be adjusted between the buyer and seller depending on when the taxes were last paid and which party is responsible for each portion of the tax period.
The buyer may receive a credit or owe an adjustment depending on the timing of the closing and the tax billing cycle.
2. Property Tax Escrow
If your mortgage includes an escrow account, the lender may also collect several months of property taxes at closing.
This money is placed into your escrow account so the mortgage servicer will have enough available to pay future property tax bills when they become due.
The amount collected depends on the closing date, when the next tax bill is due, and the lender’s escrow calculation.
HOA Fees and Other Prorations
If the property is part of a homeowners association, certain HOA dues or fees may need to be collected or adjusted at closing.
Other property-related expenses can also be prorated between the buyer and seller.
In New Hampshire, one common example is fuel remaining in a tank at the property. The buyer may reimburse the seller for the value of the remaining fuel at closing.
Why Can Prepaid Items Change Before Closing?
Many prepaid items are based on timing, so the final amounts can change if the closing date changes.
Moving the closing date can affect:
- Prepaid mortgage interest
- Property tax prorations
- The amount needed for the tax escrow account
- HOA prorations
- Certain other property-related adjustments
That is why prepaid items shown early in the mortgage process are often estimates and may change before the final Closing Disclosure is prepared.