The home loan process can sometimes be confusion. One of the main points of confusion is the difference between escrow and prepaid items. When it is time to close on your home, it is important that you understand what they are and the fees you are facing.
What Are Escrow Costs?
During closing, you will have to pay certain expenses related to the actual real estate transaction. In essence, you have to pay the people and businesses that were involved in working on your loan.
Escrow costs can vary, but they usually cover the loan origination fees, attorney fees, title search and insurance fees, and credit report charges. You even have to pay for the home inspection and appraisal required by your lender.
You are solely responsible for the escrow costs, but some sellers are willing to negotiate to pay part or all of the costs. The seller might agree to split the costs with you in an effort to keep the purchase of the home on track. Your real estate agent or attorney can help with the negotiations.
What Are Prepaid Items?
Prepaid items are payments that are also required by the lender. However, they are different from escrow costs. Prepaid items are not necessarily related to the purchase of the home but to the home itself.
The prepaid items that your lender could require you to pay include real estate taxes, homeowners association fees, and mortgage insurance premiums. The lender will determine how much of each you will need to pay at the closing.
For instance, the lender might require you to pay several months of the insurance premiums at close to ensure that the policy is paid through a pre-determined time period.
Can You Reduce Closing Costs?
Since closing costs are unavoidable, you can explore ways to lower the amount that you have to pay. For instance, if you are financing your home through your bank, find out if it offers a loyalty program. If so, the bank might be willing to cut some of the fees you face, such as the origination fees for the loan.
Since you are tasked with paying your mortgage insurance at the closing, shop around for coverage. If you currently have coverage on a car, find out if you can save by bundling your home's coverage with it.
Work with your lender and real estate agent to find out more about closing costs and what you can do to save on them. You might also want to consider home loans with Best Rates Mortgage, LLC.