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When you buy a house, you will have to prepay for some expenses. Make sure you understand what you will be expected to pay for at closing so you will have enough money available.

Expenses You Will Have to Pay for up Front
Your lender will require proof that you have obtained homeowners insurance before you will be able to close. You may be required to prepay a year’s worth of homeowners insurance premiums. 

The lender will also collect prepaid interest at closing. That will give the company money for interest to apply to your first mortgage payment before it issues your first loan statement. The amount of interest you will have to prepay will depend on the date when you close on your new home. If you close toward the end of the month, you may not have to prepay as much in interest as you would if you closed at the beginning of the month.

When you close on a house, you may have to make an initial payment to cover two months’ worth of homeowners insurance premiums and property taxes. The lender will place that money in an escrow account so it will be able to withdraw funds to pay those bills when they come due.

Differences Between Prepaid Expenses and Closing Costs
Prepaid expenses are separate from closing costs. Closing costs are fees associated with buying a house. They include things such as underwriting and title fees. Prepaid expenses are fees that you would pay while owning a home, though they are not related to the process of purchasing a house.

Your Loan Estimate will include information on prepaid expenses in a section on Page 1 called “Other Costs.” If you get Loan Estimates from multiple lenders, the amounts listed for prepaid expenses may be different. Those are just estimates that shouldn’t influence your choice of lender. You will get to choose a homeowners insurance company and your property taxes will be the same no matter who your lender is. 

You May or May Not Need an Escrow Account
A lender may require you to have an escrow account to protect itself. If you pay money toward property taxes each month, that helps the lender ensure that the government won’t place a lien against the property. If you provide funds for homeowners insurance premiums every month, that lets the lender know that its collateral is protected. 

If you get a government-backed mortgage, you will be required to set up an escrow account. Your lender may also require you to have an escrow account if you get a conventional mortgage and make a down payment of less than 20 percent of the purchase price. 

If you take out a conventional loan and put down at least 20 percent, the lender may waive escrow and let you handle homeowners insurance and property tax payments yourself. You may be charged with a fee to waive escrow.

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