Mortgage Pre-paids and Escrows for Apopka Florida Home Purchases
Some mortgage terminology that you will come across when buying a home are mortgage pre-paids and escrows. These are separate from closing costs. It can be helpful to understand how mortgage pre-paids and escrows for Apopka Florida home purchases work.
What Are Pre-paid Expenses?
By definition, pre-paids are items that you are paying ahead of time. The most common pre-paids are property taxes and homeowner's insurance. When you have a mortgage, your lender wants assurances that these two are paid on-time. Why?
Homeowner's insurance protects their interests as much as it does yours. Lenders never want your insurance to lapse, so they prefer to pay it. In regards to property taxes, if you failed to pay taxes, a lien would be placed on your property. Tax liens supersede mortgage liens. Therefore, mortgage companies want to make sure property taxes are always paid. This would put them first in line as a property lienholder.
Most mortgage companies will require pre-paids and escrows for Apopka Florida home purchases. However, some will make it optional if you are financing a small amount of the actual value of your home.
What Are Escrow Accounts?
An escrow account is where money is held on your behalf. It's still technically your money, but your lender manages the account. Each month, you will be asked to contribute to the escrow account as part of your monthly mortgage payment. The yearly amount is normally divided into equal monthly payments. When tax and insurance invoices are due, the lender pays it for you with the funds from this account.
Lenders always want to make sure there is enough money in this account to cover those bills. They also like to have a cushion of at least one month.
How Much Must Your Prepay?
In addition to the monthly contribution, you will often have pre-paid expenses due at closing. The amount depends on your closing date and when the invoices are due. Remember, lender's need to have enough in the account to pay the bill plus have a cushion remaining in the account. Homeowner’s insurance premiums are due yearly and it’s common for lenders to collect two months’ worth. Property taxes are due yearly as well in Apopka Florida. Invoices are issued November 1st and payments are due by the following March 31st.
It possible that the exact amount for taxes may be unknown at the time of your closing. In that case, lenders will collect taxes based on the previous years’ tax bills. Your monthly payment could change if the tax rate increases, requiring your lender to collect a little bit more each month for the escrow account.
Summary of Pre-paids and Escrows for Apopka Florida Home Purchases
Home buyers often estimate money needed for closing costs but tend to forget pre-paid expenses. Given that pre-paids are due both at closing and every month, it is important not to forget this when calculating your monthly costs of home ownership. Also, if you pay off your loan (from selling or refinancing), any money remaining in the escrow account will be returned to you!