Types of Prepaid Costs for Mortgages

Most would-be homeowners assume getting a mortgage is as easy as shopping around for the best lender then signing a few forms and getting the keys to your home. Unfortunately, homeownership is not easy. There are several stages involved before you can get the keys to your dream home.

Most people will forego their homeownership journey when they encounter the numerous hurdles they have to pass. The key to a hassle-free mortgage process lies in a thorough understanding of what to expect.

One of the things a mortgage company in Salt Lake City will expect you to settle before you can occupy your home are prepaid expenses. Prepaid items on your loan encompass those which you will pay before the money for your mortgage is advanced.

These costs are in no way mortgage closing costs but are instead held in an escrow account and used to make certain payments. After the funds are exhausted, the items will form a part of your homeownership monthly and annual expenses.

The following are some of the prepaid items which apply in various types of mortgages.

Property Taxes

There are different taxes you will be required to pay when you own a home. The exact amount of property tax you will owe primarily depends on the location and cost of your home. Most lenders will hold funds to cover property taxes for 6–12 months.

Homeowners Insurance


The collection of your homeowners’ insurance premiums upfront ensures that your home is adequately insured from different hazards for about 12–14 months after its purchase. In most cases, a lender will allow you to choose your insurance provider.

Some insurers have special premiums for clients who also hold car insurance with them so shop around for optimal rates before picking your insurer if your lender allows it.

Flood Insurance

This is required if the appraisal of your home shows that it is built in a flood-prone region. The standard homeowners’ insurance will not recompense you for your property’s flooding. Even after investing in flood insurance, it is prudent to take additional steps to mitigate the effects of floods on your property.

Mortgage Interest

This will be collected as a prepaid expense so that your lender is guaranteed that the interest of your initial mortgage repayment is paid irrespective of when you will close on your loan. The payable interest will vary based on your rates and the date you will close your loan. Some lenders might opt to close mortgages towards the end of a month so that your accrued interest is reduced.

These prepaid costs are in no way meant to increase the financial burden of closing your home loan. These are after all expenses that you will be required to pay over your loan’s lifetime.

By collecting the monies meant to cover the above expenses upfront, your lender eases your transition into homeownership and gives you time to settle down and learn what is expected of you. To allow you to compare the prepaid items between lenders easily, your lender will give you a ‘Good Faith Estimate.’ This document will itemize the transactions and give you a clear picture of what you are paying for.

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