What are Prepaid Items or Escrows?

What are Prepaid Items or Escrows?
Sammamish Mortgage
Post Date: Updated:

Confused by terminology like “escrows” and “prepaid items” when it comes to your mortgage contract? Don’t go into your home purchase blind. Here’s what you need to know about these expenses and the account you’ll need to fund to cover them.

Your Escrow Accounts

When you put in an offer on a home, you’ll need to come up with “earnest money,” to protect the seller in case you back out without cause. This money is kept in an escrow account, where it can’t be accessed by you or the seller until specific terms are met.

Your earnest money will go towards the closing costs, prepaid items and down payment at closing and reduce the cash you have to bring to the closing table..

When writing an offer your Realtor should advise you on contingencies such as an inspection contingency or financing contingency which allows you to receive a refund of your earnest money if there are issues with the property or with your loan approval.

Prepaid Items or Escrows

Prepaids are expenses that you will pay at closing before they technically come due. You might be required by your lender to pay monthly or annually in advance for taxes, hazard insurance, private mortgage insurance, or special assessments.

Your lender may require you have two months worth of payments deposited in the escrow account at closing. Once your escrow account is funded you will be required to pay the prorated portion of your taxes and insurance month so your lender can continue to pay the premiums  when they come due in the years ahead.

How Escrows Affect Cash Needed to Close

Your escrow deposit will vary based when you close your loan and when your new property taxes are due. Generally the buyer and seller split their portion of the property taxes due during the timeframe of the home sale; however, every state is different so talk to your lender to get a clear idea of the property taxes you can expect to pay based on your closing date.

Homeowners insurance is another expense that may be mandated as a prepaid item by your lender generally requiring the full year premium paid at closing.

Some of these items may be managed by your lender, paid along with your mortgage payment, and the appropriate funds directed to your escrow account, which in turn pays taxes and insurance payments on schedule.

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