Prepaid items are advance collections at closing for interest, insurance, taxes, or similar expenses covering an identified period.
Prepaid items are amounts collected at or before closing for interest, insurance, taxes, or similar expenses covering an identified period. They are disclosed in Section F of the Loan Estimate and Closing Disclosure rather than as lender-service fees.
Prepaids increase Cash to Close, but they generally pay an actual time-based obligation. Prepaid interest covers days before the regular payment cycle, and an upfront homeowner’s insurance premium buys property coverage.
That distinction matters when comparing lenders. A lower insurance estimate does not make the loan cheaper if the same policy ultimately costs more. Borrowers should compare identical coverage, dates, and assumptions.
Prepaids also differ from Initial Escrow Deposit. Prepaids pay a current or near-term charge directly; the initial escrow deposit creates a reserve for future servicer payments and is disclosed separately in Section G.
The Loan Estimate shows estimated periods, daily interest, and amounts in Section F. The Closing Disclosure provides final figures based on the actual policy, tax status, interest rate, and disbursement date.
The borrower should check the coverage period and avoid double-counting an amount already paid before closing. The paid-before-closing column can show that an item is part of closing costs without being due again in the final wire.
A changed Closing Date can alter prepaid interest by changing the number of days between funding and the next payment cycle. Tax and insurance timing can also change the required period.
A buyer closes on June 20 with a $300,000 loan at 6.5%. Using a 365-day calculation for illustration, daily interest is about $53.42. Eleven days through June 30 produce roughly $587.67 of prepaid interest. The lender’s actual convention and disbursement date control the disclosed amount.
The borrower also paid the annual homeowner’s premium directly before closing. It appears as paid before closing rather than increasing the final wire again.
| Prepaid item | What it usually covers |
|---|---|
| Prepaid Interest | Daily interest from funding until the regular payment cycle begins |
| Prepaid Homeowners Insurance | Insurance coverage that must be active at or near closing |
| Prepaid Property Taxes | Tax amounts collected because of local tax timing or settlement needs |
| Mortgage or flood insurance premium | Coverage required to be paid in advance when applicable |
| Question | Section F: Prepaids | Section G: Initial Escrow Payment |
|---|---|---|
| What happens to the money? | Pays an identified current or advance charge | Remains in the escrow account for future bills |
| Common examples | Daily interest and upfront insurance premium | Monthly tax and insurance reserves |
| Can timing change it? | Yes, through coverage and disbursement dates | Yes, through the escrow schedule and bill due dates |
| Is it a lender fee? | No | No |
Prepaid items differ from Closing Costs because prepaids are one subsection within the broader closing-cost total.
They also differ from Prorations. Prepaid items are amounts collected in advance for future obligations, while prorations allocate certain current-period costs between buyer and seller.
They differ from Prorations because prorations allocate a shared period between buyer and seller. A prepaid can apply even in a refinance with no seller.