Simple Real Estate Definitions : Prepaid Items

Prepaid items are monies that are related to the home itself, and are not payable to third-parties faciliating the transaction

When buying a home, you pay for more than just physical property at the closing table. You also pay a series of charges. Commonly, home buyers lump all of these charges under the heading of “closing costs”.

It’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”.

The “prepaid items”collection can 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

Specifically, prepaid items are payments related to the home — not to the third-parties that facilitate the transaction. The latter is known as “closing costs”. Closing costs can include lender fees, title fees, and government fees, among others.

An easy way to separate prepaid items from 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 is most likely a prepaid item.

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