Closing costs generally refer to fees charged by lenders and third parties. Pre-paid expenses and escrows are also included in closing settlement statements and are often referred to as closing costs, although they are really a distinct category. Information on pre-paid expenses and escrows for New Jersey home closings is offered in this article.
Pre-paid Expenses
Pre-paid expenses are fees that must be paid at closing but technically cover a future time frame. Popular pre-paid charges are insurance and interest. Homeowners insurance has an annual premium that must be paid in advance. Some buyers pay the premium directly to the insurance provider before the closing, while some pay it at the closing. Interest is another pre-paid charge. Mortgage payments are commonly paid in arrears, meaning that they cover a past month. For example, if you buy real estate January 15th, your first loan payment would be due on March 1st, and it covers the February time frame. So there is no payment covering January 15th-31st. The interest for that period of time is billed at the closing as pre-paid interest.
Escrows for Property Purchases
Escrows are payments held in a holding account, known as an escrow account, and disbursed when needed. They are set up to cover recurring charges such as private mortgage insurance (PMI), real estate taxes, and property insurance. Each month, as part of the regular mortgage payment, a certain amount is deposited into the escrow account. When PMI, taxes, or insurance payments are due, the appropriate amount is taken from the escrow account. This accomplishes two goals. First, it reduces the hardship of home buyers having to save for the large lump sum payments. Secondly, the lender ensures that the bills are paid, which preserves their interest in the home. Escrows are not mandated by all lenders, but it is typical for loans with small down payments.
Information On Pre-paid Expenses And Escrows For New Jersey Home Closings
The amount of pre-paid expenses and escrows will differ based on the time of year or day of month. Closing close to the end of a month will minimize pre-paid interest. Pre-paid taxes and escrows will depend on the municipality and when tax statements are required. If minimizing funds required for closing is important, discuss the time frame with your real estate broker and mortgage consultant. For additional resources or guidance on the above “Information On Pre-paid Expenses And Escrows For New Jersey Home Closings”, you may reach Diana Escobar-Wachter at Access Abstract Corporation via phone at 610-461-2910 or email at wachterd@accessabstract.com.
