When buying a home, it’s essential to understand all the financial aspects involved, including both closing costs and prepaid expenses. While both are paid at closing, they serve different purposes and cover distinct types of fees. Here’s what you need to know about the difference between closing costs and prepaids.
What Are Closing Costs?
Closing costs refer to the various fees required to complete the purchase of a home. These costs are due at the time of closing and relate to the mortgage process and transfer of ownership. Common closing costs include:
Loan Origination Fees – Charges for processing your loan application.
Appraisal Fees – Fees for determining the market value of the home.
Title Insurance – Protection against potential issues with the title to your property.
Attorney Fees – Legal services for preparing and reviewing closing documents.
Inspection Fees – Home inspections to check for potential issues.
Recording Fees – Fees for filing the property’s sale with your local government.
Survey Fees – Costs for land surveys to determine property boundaries.
Underwriting Fees – Charges for the mortgage underwriting process.
What Are Prepaid Expenses?
Prepaid expenses are upfront payments made at closing for costs that will continue over time. These expenses are directly related to homeownership and are paid in advance to ensure that future bills related to the home are covered. Common prepaid expenses include:
Homeowner’s Insurance Premium – Insurance coverage for your home, typically paid for a year upfront.
Property Taxes – Payments to cover upcoming property taxes.
Mortgage Interest – Interest accrued between your closing date and the first mortgage payment.
Escrow Deposits – Funds set aside for future payments of insurance and property taxes.
Key Differences Between Closing Costs and Prepaid Expenses
Purpose: Closing costs are associated with the services and fees involved in obtaining a mortgage and finalizing the home purchase. Prepaid expenses, on the other hand, cover ongoing costs related to owning the home, like insurance and taxes.
Timing: Closing costs are generally one-time fees that are paid at the time of closing. Prepaid expenses are advance payments for ongoing bills you’ll encounter as a homeowner.
Types of Fees: Closing costs typically include fees for services such as appraisals, title work, and loan origination. Prepaid expenses cover recurring payments.
Our team at Sage and Cedar Real Estate can provide you with expert guidance every step of the way. Whether you’re a first-time buyer or looking to upgrade to a new home, understanding your financial obligations is key. For more tips and advice, or to schedule a buyer consultation, visit us here today!