Buying a home is an exciting milestone, but navigating the closing process can be daunting. One of the most common questions we hear at the closing table is, "Why am I paying so much for property taxes and home insurance? Am I paying for them twice?"

It's a great question, and the answer is an essential part of understanding your new mortgage.

The video below breaks down exactly what's happening with these "prepaid" costs. As a quick summary, these payments aren't a duplicate; they're a vital step to properly fund your escrow account—a special account your lender sets up to manage these ongoing expenses for you.

*Not the reading type? Watch the video here.

The Role of Your Escrow Account

Your monthly mortgage payment is more than just principal and interest. It also includes a portion for your property taxes and home insurance. This portion of your payment is set aside in your escrow account, serving as a financial cushion. When your large annual or semi-annual bills for taxes and insurance are due, the lender pays them from this account on your behalf.

But here’s the catch: these big bills can come due before you’ve had a chance to build up enough money in your escrow account through your regular monthly payments.

Prepaids in Action: A Real-Life Example

Imagine your annual property tax is $5,000 and your home insurance is $1,200. This means you'll pay $516 a month toward these bills. If you close on your home on September 15th, and your first tax payment is due on November 1st, there's a problem.

Your first monthly payment isn't until November, but you need to pay that tax bill right away. If you only had one monthly payment go into your escrow account, it would be far short of the amount needed.

That's where prepaids come in. At closing, the bank collects a lump sum to "pre-fund" your escrow account, ensuring there is enough money to make these large payments when they come due. This initial deposit typically includes:

• A full year of your homeowners insurance. This ensures your property is protected from day one.

• A pro-rated amount of your property taxes. This covers the period from your closing date to the next tax due date.

• A reserve balance. Lenders are legally allowed to hold a small reserve (typically two months' worth of taxes and insurance) to protect against unexpected increases in your annual bills.

While it feels like you're paying a big amount twice, you're actually just ensuring your escrow account is healthy from the start. This process gives you peace of mind and protects both your investment and your lender's.

Ready to Learn More?

Understanding your total cash-to-close is crucial for a smooth homebuying journey. Prepaids are just one component of a larger picture that includes your down payment and closing costs.

At Munshi Capital Inc., we're committed to making every part of the mortgage process clear and simple. For more insights on hard money loans and real estate investment, feel free to explore our resources.

Visit los.munshi.biz to get real-time rates and a transparent look at all your costs. With Munshi Capital, you're always in control of your financial decisions.

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