Calculating prepaid cost when buying a home is a very demanding task even with the help of apps like a mortgage loan payment calculator. When people come across real estate deals for the first time, they often make the same mistakes. But before starting the calculations, it is advisable to decide on the type of housing and the desired area. If you’re in no rush to buy, you might consider building options like Smart Brickell. This condominium in a nice area of Miami will be completed by the summer of 2021. Once you have set a goal, you can begin to work out a detailed purchase plan.
What are prepaid costs?
Common prepaid costs include the amount that must be paid before the deal is closed. This payment must be made before the first installment on the mortgage. Usually, this amount is credited simultaneously with the payment of tax and insurance. Despite the fact that prepaid costs are separated from mortgage loans, the total loan amount affects their size. For example, if you choose an apartment in the posh Hallandale Oasis complex, which will be completed in 2021, the prepayment will be higher than if you buy a home on the secondary market.
What’s the difference between prepaid costs and closing costs?
The final amount after the closing of the transaction includes the principal amount of the mortgage loan and the interest charged on top for using the bank’s money. However, the costs of a real estate attorney, realtor, insurance and real estate purchase tax (not in all cases) are required.
These amounts are most often the same (except for the tax amount). In any case, the buyer will have to pay for the services of a lawyer or an expert appraiser, regardless of how much the house costs. The work of specialists who help to carry out the transaction will have to be paid even if the bank refused to issue a loan.
Another good example is buying a home with your own capital. If you don’t have a mortgage and don’t have to pay interest, you still need to pay taxes, a lawyer, and a realtor.
What common prepaid costs can I expect?
In order to properly plan your budget for buying a home, it is best to try to take into account all possible expenses in advance. It is advised to include the following points in the prepayment:
- Homeowner’s insurance premium;
- Property taxes in your state;
- Interest on the mortgage that you will pay to the bank or credit institution.
- Existing liens to achieve clear title.
All these costs will be borne by the buyer regardless of whether the transaction takes place or not. If the loan is approved and received, but the transaction did not take place for some reason, the debtor is still obliged to pay the due interest. Since all these additional expenses cannot be avoided, they must be included in the total amount that the buyer will eventually pay for the house or apartment.
Where can I find prepaid costs outlined in my loan documents?
A potential buyer can make preliminary calculations using online calculators on specialized sites. But the exact amount will be calculated by bank representatives and realtors in the presence of the seller (this is necessary if the client wants to get a discount). However, finding the relevant data in financial documents without the help of a lawyer can be problematic. But since the contract is concluded in a standardized form, an inexperienced buyer can find the amount of interest in the column “other expenses”. When it comes to bank documents that show the calculation of a mortgage loan, the amounts included in the prepayment are reflected in section F, which is called “Prepayment”, and section G, which is called “Initial contingent payment at closing”.
The most important mistake inexperienced buyers make is the choice of a credit institution based on the smallest prepayment amount specified in the commercial offer. Banks don’t care how much taxes and commissions you pay to the realtor. The bank representative can indicate the approximate amount of the prepayment based on his experience. But in practice it turns out that the buyer will pay the commission requested by the lawyer and the realtor. The amount of remuneration will depend on the tariffs of the company, and not the opinion of the lender. The same goes for real estate tax and insurance. These amounts are regulated by the laws of each state, so the lender has no authority to offer lower rates.