Prepaids and Closing Costs | Stop Getting Surprised at Closing

Hey guys, welcome back to another week of Mortgage Matters in Minutes. I'm your host and owner, Brent Rasmussen. If you haven't checked us out before, we've been doing this weekly show for over four years now. And our goal is to come to you with factual information about how mortgage lending works and the process behind it and some common questions that we see each and every day. And even though we've covered this in some past videos, we thought we would recover it today because things change a little bit throughout time and so do numbers. So today's topic we're going to chat about is what are home loan prepaids and closing costs? And again, if this interests you, please like and subscribe below, comment, and continue to check us out because we're going to come straight to you with 5 to seven minutes of education without dragging it out too terribly long. So, today, prepaids and closing costs, what do those mean? Those are different than what's called down payment. And a lot of times when clients call us, the question comes up is, "How much down payment do I need to buy a home? And what they are really asking is how much money do I need to buy a home? Because yes, down payment, prepaids, and closing costs make up how much money you need to purchase a home. That is if you're taking out a loan, but if you're paying cash, you don't have to worry about closing costs and/or prepaids. The down payment is going to be the full price of the home. So, as you can see, there's different words that get interchangeably used in our industry. and we're here to help answer some of those questions that arise. So again, as we just mentioned, prepaids, closing costs, down payment, all three of those add to what's called the cash to close. So let's first talk about down payment. Down payment is going to be a percentage of the price of the home. 5%, 20%, 40%. That's really easy to calculate. But the prepaids and closing costs, not as easy to calculate off the top of your head. And us as lenders, we have standardized formulas and numbers that we use to quote those and we expose those to clients on fees worksheets, loan estimates, and closing disclosures are generally the three times that you're going to see the different breakdown of those particular numbers. So, when you're putting in an offer on a home, many times your real estate agent will reach out to either me or my client will reach out to me and say, "I want to see what numbers look like on this particular house." And that's what we would provide to them is what's called a fees worksheet to show here's how much you might need for cash to close, which break down all these numbers while also giving you a payment. So prepaides, this is how much money is set aside for house insurance and property taxes. And again, why does a lender care about putting that money aside? They want to make sure that the property taxes are paid because property taxes, if unpaid, can become a lean that goes ahead of the first mortgage. So if you get foreclosed upon, the taxes get paid first, then the mortgage get paid second. So, if the lender knows there's a chance for them to not make their full amount, they're going to be worried about that. So, they want to put that into a separate escrow account to make sure those taxes get paid along the way. Second part of prepaids is what's called homeowners insurance, house insurance, hazard insurance. It's all the same word there. Basically, it covers the property of wind, fire, hail, tornado, significant damage to your property. And why does a lender care you have insurance? Well, if your house and property gets totally demolished and taken away or significantly damaged, they want to make sure there's money to pay off that mortgage loan that exists out there. So, the risks for prepaids do happen for the lender. And the reason why they sometimes require you to have escrows if you put down less than 20% is to remediate that risk to remove that risk from that lender to ensure those property gets taken care of and those items get paid. So next we're going to talk about closing costs. Closing costs are going to be the costs that are needed to obtain the loan. items like an underwriting fee, an appraisal, a credit report, title insurance, title closing fees, recording fees, surveys, plot plans, all those different things that are what's called a normal closing cost. those are going to be charged obviously if you take out a loan. If you're paying cash, closing costs don't exist. So, going back to the price ranges of those things, prepaids range depends on how much house you buy, meaning how much taxes and insurance those are on the property. So, those could range anywhere from $5 to $50,000. Depends on the price range, but closing costs generally are going to stay in a pretty close window. When we first covered this topic four years ago, that range was somewhere between 2500 and 3500. Over the last few years, closing costs have increased. So, because of that increase, we're seeing that number go up. And generally now, we're seeing somewhere between $3 to $4,000 for average closing costs. If you're buying a more expensive property, closing costs could range four, five, or $6,000. But if you start seeing numbers much higher than four, five, or $6,000, now you're paying extra additional discount points to lower the interest rate. And those aren't mandated. those can be removed and those can be negotiated. So discount points are something completely different than your standard closing costs would be. I would share that local lenders are going to quote you more accurately on the prepaids and closing costs because we know the local area where I wouldn't necessarily know an area in West Virginia or Oregon because I don't live there. I don't know what happens on a regular basis with those property taxes and those house insuranceances. Here in Omaha, we have some of the most expensive property taxes and house insurance on average across the country. And people don't realize that. So, it makes it much more expensive for an average individual's house payment when they got to pay not only the loan but also their house insurance and their property taxes in their escrow account. So again, someone local like ourselves would love to assist you in put together those estimates. Also explain to you what every line item should be. When we're putting together estimates, a lot of times what those are is estimates. We want to get as close as we possibly can to getting you the real number. We don't want to be off. We don't want to try to lowball something. And I know many of times people want exact numbers. That's not necessarily going to be a factual thing to get exact numbers at the beginning of the process because we don't know what house you're going to buy. We don't know how much the taxes are on that house. We also don't know what insurance company you're going to use on what house. So those numbers can vary a little bit. But when it comes to the closing costs themselves, we do have an understanding of what those numbers are going to be. So we can itemize those much more exact in regards to start to finish. When it comes to down payment, that's also very easy to math out as a percentage or a dollar amount against the sales price. Those are a lot of words we've covered here today in regards to lending, whether it's down payment, closing cost, cash to close, prepaids. As you can see, they come off our tongue fairly easily. And as we've mentioned before here at Mortgage Specialists, there are no retakes. We go through this video first time, first take. This is the ending. and we appreciate you checking us out. We're always a phone call away at 402-991-5153 or you can check us out on our website at mtg-specialists.com. Have a great rest of your week and we'll see you here next time. Mortgage Specialists, driven, trusted, reliable.