Prepaids and Escrows: Why Am I Paying These at Closing?

Prepaids and Escrows: Why Am I Paying These at Closing?

When buyers in Fort Wayne review their Loan Estimate or Closing Disclosure, two sections often create confusion: prepaids on a mortgage and escrow payments.

I hear the same questions from first-time homebuyers and move-up clients alike. “Why am I paying homeowners insurance already?” “Why are you collecting property taxes if they aren’t due yet?” “Is this another lender fee?”

Those are fair questions because prepaids and escrows can make the amount needed at closing look higher. But they generally aren’t fees being charged by the lender. They are funds associated with expenses of owning the home.

Here’s what you need to know.

What Are Prepaids?

Prepaids are certain expenses that are paid in advance at closing. Two of the most common are homeowners insurance and prepaid interest.

Homeowners Insurance

Mortgage lenders typically require homeowners insurance to be in place when you purchase a home. In many transactions, the first year’s insurance premium is paid at or before closing. That isn’t an extra mortgage fee. You’re paying for the insurance coverage on your home.

Prepaid Interest

Mortgage interest is generally paid in arrears, meaning your regular monthly mortgage payment covers interest from the previous month. At closing, interest may be collected from the date your loan funds through the end of that month.

For example, if your loan funds on August 20, prepaid interest may be collected for August 20 through August 31. Your first regular mortgage payment would then typically be due October 1. This is also why the amount of prepaid interest can change depending on what day of the month you close.

What Is an Escrow Account?

An escrow account is different from a prepaid expense. When your mortgage includes an escrow account, a portion of your monthly mortgage payment is set aside to help pay certain property-related bills when they become due.

The two most common escrowed expenses are property taxes and homeowners insurance. Instead of receiving a large property tax or insurance bill and paying it entirely out of pocket, you’re essentially contributing toward those expenses throughout the year as part of your mortgage payment. When the bill becomes due, your mortgage servicer uses the money accumulated in the escrow account to pay it.

Why Is Money Collected for Escrow at Closing?

Your escrow account starts with a $0 balance. However, property tax and insurance bills don’t necessarily become due exactly 12 months after you purchase the home. Your mortgage servicer may need money available before enough monthly payments have been made to cover the next bill.

That’s why an initial escrow deposit may be collected at closing. Think of it as establishing the starting balance of your escrow account. The amount collected can vary based on several factors, including your closing date, when property taxes are due in Allen County, the amount of the property taxes, your homeowners insurance premium, and when the next insurance premium is due.

Do I Have to Pay Prepaids?

Yes, prepaids are a standard part of most mortgage transactions. They ensure your home is protected and that your first few months of ownership are covered. Skipping them would leave gaps in coverage that could create bigger problems later.

Can I Pay My Escrow Separate or on My Own?

Most conventional loans require an escrow account. Some government-backed loans may allow you to waive escrow if you meet certain equity or credit requirements, but that option isn’t available on every loan. Paying taxes and insurance on your own is possible in limited cases, but your lender still needs to confirm the bills are paid on time.

Can My Escrows Be Paid in the Loan Balance?

No. Escrow funds are collected separately and held by your servicer. They cannot be rolled into your loan balance.

Do I Get My Escrow Back?

If you sell your home or refinance and the new loan does not include escrow, any remaining balance in the account is typically refunded to you after the final bills are paid.

When Do I Get My Escrow Back?

Refunds usually arrive within 30 days after the final tax or insurance payment clears. Your servicer will send a final statement showing the balance and the refund amount.

Do I Have to Pay Taxes and Insurance If I Escrow?

You still own the responsibility for those bills. The escrow account is simply a convenient way for your servicer to pay them on your behalf using the money you’ve already contributed.

Why Does My Lender Have to Pay My Escrow?

Your lender requires escrow on most loans to protect their interest in the property. If taxes or insurance go unpaid, liens or coverage gaps could affect the home’s value and the security of the loan.

Frequently Asked Questions

• What are prepaids on a mortgage? Prepaids are advance payments for items like the first year of homeowners insurance and interest from closing day through the end of the month.

• What is an escrow account? It’s a separate account your servicer uses to hold portions of your monthly payment so property taxes and insurance can be paid when due.

• Can I pay my escrow on my own? In most cases, no. Escrow is required on the majority of loans originated through Ruoff Mortgage.

• Do I have to pay prepaids? Yes. They ensure coverage starts immediately and prevent gaps that could cause issues down the road.

• When do I get my escrow back? Usually within 30 days after your loan is paid off or refinanced and final bills are settled.

• Can my escrows be paid in the loan balance? No. Escrow funds are collected and held separately from your loan principal.

Ready to explore your options? Reach out — I’m here to help.