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PrePaid costs are those items which are required to be paid at closing, yet are not considered a closing cost. These normally include: Days of Interest, Property Taxes, and Hazard Insurance. Most mortgages are paid in arrears, meaning that when you have a payment due on the 1st of the month, you are actually paying the principal, interest, taxes and insurance for the previous month. Therefore, a closing that occurs on the last day of the month, the 31st, would only have one day of pre-paid interest expense. A closing on the 15th of the month, would have the number of days from the 15th to the end of the month, and the 15th would be included in that count.

Property taxes and hazard insurance (homeowners insurance) are much the same. A lender will pay the taxes and insurance from an escrow account in most instances. If a borrower pays their own taxes and insurance, then there will be no prepaid item for these costs. A lender must have 12 months of payments upon the first of the month when that bill for taxes or insurance is due and payable. Therefore, they will collect enough prepaid charges at the time of closing to assure that this will be achieved, based on the number of months of payments will be made prior to the time those payments are due to your city, county, state, or insurance carrier. In addition, they will add 2 or 3 months payments to provide a comfort level that this money will be available. This is permissable by law, and protects the lenders from those who miss payments, are late, etc.

These costs on this particular line of the application are actually transferred from the Good Faith Estimate (GFE) and are identified in more detail there. They will change as the loan process progresses, since the day of closing, the month when payments for taxes and insurance are due, and the actual amounts owed for taxes and insurance are determined.

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Q: On page 3 of Fannie Mae Form 1003 section VII Details of Transaction line E estimated prepaid items can someone give an overview of these cost?
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