How Prepaid Items Can Make Your “Closing Costs” Look Inflated
When buying a home, you pay for more than just physical property at the closing table. You also pay a series of charges. Commonly, homebuyers lump all of these charges under the heading of “closing costs”. That’s a miscategorization.
Many changes on a HUD-1 Settlement Statement are specifically not closing costs. They are more appropriately designated as “reserves” or monies “paid in advance”.
These “prepaid items” include:
- Advance mortgage interest paid from the closing date to month-end
- Real estate taxes paid into an escrow account
- Homeowners insurance paid into an escrow account
Prepaid items are payments related to the home itself, and not payable to any third-parties faciliating the transaction.
This is different from ”closing costs” which are charges stemming from the transaction itself. Closing costs can include lender fees, title fees, and government fees.
One way to gauge the difference between prepaid items and closing costs is to ask the question:
“Would these dollars be due even if I didn’t buy this home today?”
If the answer is “yes”, the charge in question is likely a prepaid item.
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