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Education, Misc

April 25, 2018

Prorate


Word of the day

Prorate

"To divide or distribute proportionately. With the exception of principal payments on a mortgage, most real estate expenses such as rent, insurance which is frequently prepaid for several years’ coverage and the like are paid in advance. Some expenses, however, such as real property taxes and interest on a mortgage, are paid in arrears. Upon closing a real estate transaction, these various expenses are prorated between the buyers and the sellers to ensure that each is responsible for the operating expenses of the property during their ownership. For example, if sellers who pay the fire insurance policy for a three-year period were to sell the property after the second year, they would be credited with a prorated amount equal to the cost of the remaining year. The buyer then is responsible for insuring the property and thus receives the benefit of the policy for that last year. Expenses are usually prorated as of either the date of closing or the date of possession.

In certain cases, a seller might negotiate a provision into the sales contract to the effect that any buyer credits would be applied against the balance due on a purchase-money mortgage taken back by the seller.

Some of the most common items to be prorated are sewer charges, interest on loans, insurance premiums, rent, mortgage impounds, utilities, and real property taxes."

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