What prepaids are
Prepaids are costs you pay ahead of time at closing. The two most common are prepaid interest and your first homeowners insurance premium.
Prepaid interest covers the days between your closing date and the last day of that month. Mortgage interest is paid in arrears, so your first regular payment usually isn't due until the first day of the second month after closing. Prepaid interest fills the gap.
On a purchase, you'll also pay at least the first year of your homeowners insurance premium.
What escrow deposits are
Most loans have an escrow account. Each month, part of your payment goes into it, and your servicer uses that money to pay your property taxes and insurance when the bills arrive.
At closing, you fund a starting balance so the account isn't empty when the first bill comes. The amount depends on when your taxes and insurance are due and on the cushion your servicer is allowed to hold.
Why they aren't closing costs
Closing costs are fees for services, such as lender charges, title work and the appraisal. Prepaids and escrow are different. They pay for things you would owe as a homeowner anyway.
With CapCenter's ZERO Closing Costs, CapCenter pays or waives the lender and covered third-party fees (see Offer details). Escrow deposits and prepaid interest are not covered, and on a purchase neither is your first-year homeowners premium.
A hypothetical example
Hypothetical example. Say you buy a $400,000 home and close on the 15th of the month. Your prepaids and escrow deposits might include:
- Prepaid interest for about 16 days, through the end of the month
- Your first year's homeowners insurance premium
- An escrow deposit, often around two to three months of taxes and insurance
- Together these often total a few thousand dollars, roughly $3,000 to $6,000 in this example, depending on your rate, taxes and insurance
How your closing date changes the amount
Prepaid interest depends on how many days are left in the month. Closing later in the month means fewer days of prepaid interest and less cash at closing. It doesn't save money overall, since you pay interest either way, but it can lower what you bring to the table.
Your escrow deposit also shifts with timing, because it depends on how soon your next tax and insurance bills are due.
Ways to plan for them
Your Loan Estimate lists prepaids in Section F and the initial escrow payment in Section G, so you can see them early. Some buyers negotiate seller concessions to help with these costs, within loan program limits. Your loan consultant can walk you through the numbers.
