Feb. 18, 2006 - Closing Costs vs "Prepaids"

A short mention here of the difference between closing costs and prepaids.

Many people lump these together, but a prepaid is something that will not be paid and done with at closing.  It is an advance payment of an ongoing cost.  The cost of the prepaid item will continue for many years, while the true "closing costs" will be paid and done after closing.

Here are a few examples:

The real estate commission is a seller closing cost.

The escrow fee is a closing cost paid half by the seller and half by the agent.

The requirement by the lender that a full year paid hazard insurance policy be paid at closing is a PREPAID item.  You will have to buy and pay for insurance every year thereafter.

The requirement that you pay interest to the last day of the month, at closing, is a PREPAID item.  You will have to pay interest continually for the life of the loan.

Sometimes your lender will not allow anyone else (seller/agent/mom/dad or cousin) to pay your prepaid items.

So noting the distinction can be necessary to a successful real estate purchase.