Most of the time, the word prepaid is associated with cell phone plans and services. This is the process of paying ahead of time for a particular service provider such as T-Mobile or AT&T. 

But, there are quite a few other prepaid processes that exist in other areas as well. For instance, you may be surprised to hear it when you apply for a home loan. That is especially true if you are new to applying for mortgage loans and you are unfamiliar with the terms used. 

Call Now For A Free Reverse Mortgage Quote

833-432-6968

9am-9pm EST, Mon-Fri

Does prepaid in mortgage share a similar meaning to prepaid cell phones? Exactly what are prepaids in a mortgage? 

In this article, we will uncover the meaning of prepaid in the context of a mortgage. 

What Are Prepaids In A Mortgage?

A prepaid in a home loan is money that you pay at closing related to your new home. Usually they will cover homeowner’s insurance, property taxes and some mortgage interest.  

When Are Prepaids Paid?

Prepaid interest payments are paid when you close on your home loan. Mortgage prepayments are deposited into an escrow account which will then be used to cover the expenses when they are due. 

This escrow account will usually remain open for the entire time you have your mortgage. Each month when you make your mortgage payment, you’ll pay a little extra for escrow to cover homeowner’s insurance and property taxes. This goes into your escrow account and your mortgage lender will pay those bills for you whenever they are due.

They do this to make sure this very important payments are made and the insurance company or government can’t try to take your home away for non-payment. So while you may not like having to add escrow to your payments each month, at least you don’t have to worry about paying your insurance/tax bills for your home.

So, due to prepaids, it’s usually your mortgage lender who will pay your homeowner’s insurance and property taxes. Usually you’ll pay your entire first year’s homeowner’s insurance policy amount in your prepaids. For property taxes, it depends how often taxes are due in your area and when you close on your home.

What is Included in Prepayments?

There are various things that you pay for when you pay your house loan prepayments. These include the following:

  • Prepaid homeowners insurance. Prepaid homeowners insurance is your insurance to protect your home. A majority of the time, 6 months to a year of homeowners insurance is collected during your mortgage prepayment. 
  • Prepaid property taxes: Prepaid property taxes is another thing that your house loan collector will collect during mortgage prepayment. How much property taxes will be collected depends on your house loan lender as well as the factors mentioned above. 
  • Prepaid interest: Prepaid interest is a portion of the loan amount paid to the lender as payment. It’s basically how much interest you owe between closing and when you have your first mortgage payment due.

More on Closing Costs vs. House Loan Prepayment 

It is important to know that prepayment in a house loan and the closing costs are two different things. Closing costs are the fees that are paid to your mortgage lender and other third parties for processing your house loan application.

Call Now For A Free Reverse Mortgage Quote

833-432-6968

9am-9pm EST, Mon-Fri

Leave a Reply