Pre-Paid Amounts
Required by Lenders When you purchase or refinance a home,
there will be some necessary charges to cover things like the
interest on your loan until your first payment is due. These are
called "pre-paids" and are collected on the day your purchase or
refinance is final.
Pre-paid costs required
at closing:
Interest— If your loan is finalized before the
last day of the month, at closing you must pre-pay
interest on the loan for the time between the day the loan
funds and the first day of the next month.
Homeowners' Insurance Premium — One year of this
insurance coverage that protects the lender and you if the
property is damaged is paid at the loan closing.
Private
Mortgage Insurance — Typically, if you make a down
payment of less than 20 %, lenders require Private Mortgage
Insurance (PMI) to protect themselves in the unfortunate event
that a borrower does not repay the loan. (Full Spectrum
Lending loans do not require PMI.)
Reserve or Escrow or Impound Account — This account
is set up and held in trust for you by the lender. It is used
to pay for property taxes, homeowners' insurance, flood
insurance and PMI. Usually, at loan closing enough money to
pay for at least 2 month's worth of these items is deposited
in the account. Your lender pays these bills for you when they
are due. Your monthly mortgage payment includes money that is
deposited into this account. Not all loans require a reserve
account.
