Question:

What are real estate prepayments?

Answer:

Real estate prepayments, real estate prepaid expenses or simply prepaids are payments made by a buyer at the time of closing in order to cover the initial costs of expenses, such as private mortgage insurance, hazard insurance, taxes and special assessments which are not due at that time. The money is put into an escrow account by the lender for the time when it is needed and that is why they are considered to be prepaid.

The common types of expenses included in real estate prepayments are as follows:

Hazard insurance:

The first few months' premiums for hazard insurance forms a part of the real estate prepayments. This combines the cost of various insurance protections, which can include losses occurring to one's home, its contents or loss of other personal possessions of the homeowner.

Private Mortgage Insurance:

Another real estate prepayment is private mortgage insurance (PMI). It is insurance against the risk of a borrower not being able to repay the loan and the lender not being able to recover its costs after foreclosure. Usually a down payment of less than 20 percent requires the borrower to purchase PMI.

Property Taxes:

Real estate prepayments also include a portion of property taxes that are simply passed on from the lender to the borrower. If you close early in the year these taxes may have to be paid a number of months in advance.

Prepaid Interest:

When a mortgage loan is taken out the payments don't begin until the end of next month. For example, if a deal is closed on the 17th of May, the first mortgage payment would be due on the 1st of July. This payment would only be for the month of June. The payment of the last 14 days of May would be included in the real estate prepayments.

Borrowers keep paying into the escrow account through monthly mortgage payments. It is the lender's job to separate the money that goes into escrow from these payments.

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