Closing Costs: Pre-Paid Items

I have written a few different blogs about closing costs and how to understand where your precious pennies go. This time I am focusing on one of the most misunderstood sections of the Good Faith Estimate (GFE)- The Pre-Paid Items. Don't worry "pre-paid" simply means paid at the closing, whether paid for by you or by the seller as a part of the seller's concessions, but nothing is due prior to closing.

1. Per Diem Interest: A good way to spot a phony loan officer is one that only uses a day or two of per diem on their GFE because it is an easy way to shave off a couple hundred bucks from your bottom line and easily explainable as a last minute change. So what's this for anyways? It's your first mortgage payment (but just the interest portion)- calculated from the day of your closing until the end of the month. You won't have a payment due for the next month. The interest collects through the month and your first principle and interest payment (P&I) is due on the first day of the following month, i.e. you close in August and your first full payment is due the first of October.
2. Escrow Collection: With almost all loans an escrow account is required. Mainly because a tax foreclosure threatens your lender's ability to ensure you repay them. The amount collected will change slightly depending on the time of year you close, but in general you should plan on 3 months of your Home Owner's insurance payments and 8 months of your Property Tax payments to be collected at closing. These reserves, while painful at closing, will end up making you very happy in the long run though. When your taxes go up- as they inevitably do- this will cushion the blow to your monthly payment and make the hike a more steady increase and easier to deal with.
3. Pro-Rated Taxes: Oh, the agony! Nothing causes headaches the way pro-rated taxes do. What exactly are they? It's your tax bills...and yes...it is YOUR tax bills. You see, in most places in Michigan you get two bills for Property Taxes. One for winter and one for summer. In the vast majority of places, you pay these taxes in advance meaning you are paying in July for the tax bill between July of that year and July of next year; same for the winter bill Dec.-Dec. If you buy a house, let's say in August; the seller has already paid for the taxes through July of next year yet will only own the home for one month of that bill. That means you have to reimburse them for the time that you will own the home- August through July for the summer bill and August through December for the winter bill.

Seems simple, why all the headaches? Well, with all of the foreclosure properties being bought now, there is rarely upfront truth about what the Property Taxes for your purchase are. Most times the MLS listing will reflect what the Property Taxes were before the bank took possession. When a bank owns a property they are unable to claim a Homestead Exemption like you and I. Think of the homestead exemption as a discount on taxes for you Primary Residence. The bank is not a resident, so they pay more. This also means that when you buy it from them, you pay more. Ask upfront what the non-homestead tax amount is. This will help eliminate the possibility of a BIG surprise come closing time.

For more in-depth help or answers, go to our website:

 www.iconmortgagelending.com