Which Are Prepaid Costs When Buying A Home? - HomeLight

Mortgage insurance premium (if required)

If a lender requires you to take out mortgage insurance (MI), then the mortgage insurance premium could be included in your prepaid costs if it is being paid in a lump sum at closing. You might pay a lump sum at closing and a monthly fee, but mortgage insurance is more commonly paid monthly as a part of your mortgage payment.

>>Learn more: Estimate your private mortgage insurance costs before they surprise you at closing. Use the PMI calculator to see how much you could save and plan your budget smarter.

Initial escrow deposit

Surprise, there’s more! Even after you’ve covered your prepaid costs for mortgage interest, property taxes, homeowners insurance, and possibly mortgage insurance, there’s still one more prepaid cost you might be responsible for: Your initial escrow deposit.

An escrow deposit is essentially a “cushion” in your escrow account to cover increases in taxes and insurance rates. According to Helali, “Normally, in an escrow account, what needs to be collected is what’s needed to ensure that when taxes and insurance are due, they can be paid in full, but also a two-month cushion.”

He gives this example: “If somebody’s property taxes are $12,000 a year at the time that property taxes are due, in this person’s escrow, there’s going to be enough to pay that $12,000 plus two months’ extra. So in this case, there would be $14,000 sitting aside to cover that person’s taxes.”

This “cushion” amount will be calculated by the lender by taking the projected monthly cost of property taxes and the monthly cost of the first year’s homeowners insurance premium and multiplying by two.

It’s important to note that the money in the escrow account still belongs to the homeowner. It’s just being held until certain bills and premiums are due. If there is an excess in the account, the owner could be refunded, but in the event that there isn’t enough to cover expenses, the homeowner will have to pay the difference. This is usually solved with a slight increase in the portion of the mortgage payment for taxes and insurance to account for the extra cost.

The initial escrow deposit can also refer to all of the funds that are deposited in the escrow account created by your servicer, which could cover homeowners insurance, specific hazard insurance, property taxes, and possibly mortgage insurance.