Prepaid & Recurring Closing Costs When Buying A Home
In the last video I talked about upfront costs when buying a home and today I want to talk about PREPAID EXPENSES, sometime called RECURRING EXPENSES.
PREPAIDS are charges that will be collected at the time of closing that will cover things like home owners insurance, interest for the first month of the loan, property taxes, HOA dues and possibly some Private Mortgage Insurance premiums.
Of all of these prepaids, the taxes could be the most costly because they are typically calculated based on the sale date where you could pay up to 9 months ahead. Check with your local county to determine how and when property taxes are collected. In Orange County, California, they are due on November 1st and February 1st.
Other expenses could be prepaid interest which will cover interest till the first of the month after closing when the first payment is due, homeowners insurance and flood insurance , if required, may collect one full year plus 2 months, HOA which might just collect 1-2 months, and PMI (Private Mortgage Insurance which might require 2 months payment.
There are two ways to handle making these recurring payments; have the lender create an impound account or pay them directly yourself. Depending on your financial management style one will work better for you. With the impound account, the lender will collect the money up front and disperse monthly. Your monthly payment will be a little higher but they take care of making all of the payments. The alternative is to manage your own funds and make the necessary payments as needed. Just make sure you pay these on time. Delinquent taxes and HOA dues could result in a foreclosure.
There is a general rule of thumb that these prepaid amounts will total about 1% of the home price. Of course, your estimates will vary so check with your local loan officer, closing agent or escrow for a more accurate schedule. If you don’t already have one, request a NET SHEET from your escrow or closing company which will list out an accurate estimate based on the closing date you chose. Just remember that changing the closing date will affect interest and tax calculations. I’ll cover non-recurring fees in the next video.
If you have any questions, just leave them in the comments below.