Home buyers commonly ask their lenders for closing cost estimates, but are surprised to find that the money due at closing is much higher. This is because pre-paid expenses are also due at closing. What is the difference between closing costs vs. pre-paid expenses for MA mortgages? This explanation may help.
Closing Costs
Closing costs are also known as settlement charges. They are fees charged by lenders. Below are a list of common fees. Amounts will vary based on the lender and the specific loan program.
- Credit Report
- Appraisal
- Tax Service
- Origination Charges
- Underwriting Fee
- Title Service
- Title Insurance
- Recording Fees
- City/County Transfer Taxes
- Mortgage Points
- Mortgage Insurance Up-front Premiums
Lenders will normally provide you with a detailed estimate of closing costs once you apply for a mortgage.
Pre-paid Expenses
Pre-paid expenses typically involve property taxes and homeowners insurance. They are not technically a “closing cost”, even though you must pay it at closing. Why do lenders require this to be paid through them? If you fail to pay your taxes, it would create a lien on your property. That lien has a higher priority than a mortgage lien. Therefore, lenders want to ensure it gets paid. They also want to know that homeowners insurance remains in place since that protects their interests as well.
Pre-paid expenses are funds gathered for taxes and insurance and placed into an escrow account. Each month, you contribute a little more to that escrow account. When the bills are due (annually, bi-annually, or quarterly), they are paid on your behalf from that escrow account. The amount of pre-paid expenses charged at closing depends on when you close and when the next tax and insurance bills are due.
More on Closing Costs vs. Pre-paid Expenses for MA Mortgages
To properly budget for funds needed at closing, you may ask your lender for an estimate of both closing costs and pre-paid expenses for MA mortgages. Keep in mind that the amounts will change once you have selected a property for purchase. Initially, include a buffer in your estimates so that you will have sufficient closing funds.
