Prepaid items and the initial escrow deposit

What goes in section F

Prepaids are amounts you pay at closing for costs that belong to you as the new owner:

• Prepaid interest, from the closing date to the end of the month.
• Homeowner's insurance premium, usually the first full year, because lenders want the policy paid before closing.
• Mortgage insurance premium, if your loan requires an upfront amount.
• Property taxes due soon after closing, in some areas.

Prepaid interest and your closing date

Mortgage interest is paid in arrears. The payment you make on the first of a month covers the interest for the prior month. So when you close, the lender collects interest for the days left in your closing month, and your first regular payment is usually due on the first of the month after next.

The per-day amount is your loan balance times the interest rate, divided by the days in the year your lender uses.

Close earlier in the month and prepaid interest rises; close later and it falls. Closing late in the month does not save interest overall, though. You pay the same interest either way; it just shifts between closing and your first payment.

The initial escrow deposit in section G

The CFPB explains that an escrow account is set up by your lender to pay property-related expenses like taxes and insurance, funded by part of each monthly payment. Many lenders require one. The account needs a starting balance at closing so that it will have enough money when the first bills arrive.

How many months are collected depends on when your tax and insurance bills come due. A tax bill due soon after closing means a larger deposit; one due many months later means a smaller one.

Federal rules in 12 CFR 1024.17 limit what the servicer can collect. The account may include enough to pay bills as they come due plus a cushion of no more than one-sixth of the estimated total yearly payments from the account, about two months' worth. The servicer runs an escrow analysis to set the amounts and must repeat it at least yearly.

Why prepaids can surprise buyers

• They are large. A full year of insurance plus a few months of taxes and some interest can easily total several thousand dollars.
• Seller credits may help. Some loan programs and contracts let seller credits pay prepaids, which can help, but check limits with your lender.
• They change with dates. A delayed closing changes prepaid interest and can change the escrow months.
• They move with your quotes. Your Loan Estimate uses estimates; your actual insurance policy and tax bill set the final numbers.

How to check the figures

On the Loan Estimate and Closing Disclosure:

1. Confirm the per-day interest figure: loan amount times rate, divided by 365 or 360 depending on your lender.
2. Count the days from your closing date through month-end.
3. Match the insurance premium to the declarations page from your insurer.
4. In section G, confirm the monthly tax and insurance amounts and the number of months.
5. Ask why if the number of months seems high; the cushion limit is one-sixth of the yearly total.

The CFPB's Closing Disclosure explainer shows where each of these appears so you can compare line by line.

The bottom line

Prepaids and the initial escrow deposit are your own interest, insurance and taxes paid in advance, not fees. Your closing date drives prepaid interest, your bill due dates drive the escrow deposit, and federal rules cap the escrow cushion at one-sixth of a year's payments. Budget for them and check each figure on your disclosures.