Prepaid Fees
Definition and meaning of Prepaid Fees in real estate.
Prepaid fees are specific financial charges collected by a lender at the close of a mortgage transaction to pay for upcoming recurring obligations.
In more detail
These fees are collected to fund the borrower's escrow account, ensuring that bills like hazard insurance, private mortgage insurance, and property taxes are paid on time. Additionally, lenders collect prepaid interest to cover the time between the closing date and the start of the first full monthly billing cycle.
By collecting these fees in advance, the lender reduces the risk of default on essential bills that protect the property's value. Buyers can find an itemized estimate of these fees on their Loan Estimate and the final amounts on their Closing Disclosure.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Who pays | The borrower |
| Required by | Mortgage lenders |
| Watch out for | Discrepancies between the Loan Estimate and the Closing Disclosure |
A borrower pays a sum of prepaid fees at closing to cover their first few months of private mortgage insurance and property tax assessments.
Frequently asked questions
Why do lenders require prepaid fees?
Lenders require these fees to protect their investment, ensuring that the property remains insured and that tax liens are not placed on the home.
Can prepaid fees be negotiated?
While the interest rates and insurance premiums are set, you can shop around for cheaper insurance policies to reduce the prepaid fee amount.