Prepaid Costs in a Real Estate Transaction

As most people know, there are a lot of moving parts in a real estate transaction, especially around money and ensuring that all funds are properly accounted for at the closing. This includes funds that have already started changing hands leading up to the transaction and other considerations which need to be reconciled – Right down to the last dollar.

This blog explores all the prepaid costs that are typically associated with a real estate transaction and how they are handled at closing.

Prepaid Property Taxes

Up until the day of settlement, the seller is responsible for the property taxes owed on the property. Many states and towns collect taxes differently: Some owners pay by the year and others semiannually or quarterly.

For this reason, the buyer is typically responsible for reimbursing the seller for a percentage of property taxes they’ve already paid. An escrow agent will come up with this calculation and your lender will have that amount accounted for in escrow for closing.

Prepaid Interest

Mortgage payments are typically made in arrears, meaning that the interest has accrued in the lead-up to your payment. When you close on a house, the first mortgage payment will be due by the first day of the next month. Depending on when you close on your house (e.g., the 3^rd as opposed to the 28^th) You can accrue more or less interest before your first mortgage payment.

The bank may ask you to pay your first payment during the closing, which is an advance payment. This doesn’t always happen and if your closing date is late in the month, there is little reason for them to press the matter. Still, it’s a situation that comes up from time-to-time and factored into closing costs.

Escrow Deposit Payments

A buyer will have to start making deposit payments and fund an escrow account to handle payments that might be required leading up to the settlement date. These funds help to ensure the transaction progresses smoothly and also to ensure that the balances that are owed at closing are more balanced. These payments can include insurance, taxes, etc. The deposited funds all go towards the settlement and reconciled at closing.

Homebuyers have the right to shop for their title and settlement provider. Principle Abstract and Settlement Services has been guiding buyers in Southeastern Pennsylvania through real estate transactions for years. As a trusted independent service provider not affiliated with any real estate agency, we work to ensure a smooth and successful transaction for all parties.

Ready to get started on a real estate purchase? Give our team of experienced professionals a call today.