What Are Prepaid Closing Costs?
Prepaid closing costs are upfront expenses paid at closing to cover future housing-related bills — not lender fees. Here’s what they include, who pays them, and how to plan for them.
💡 Quick Answer
Prepaid closing costs are payments made at closing for expenses that come due after closing — such as property taxes, homeowners insurance, and prepaid mortgage interest.
They are not lender fees and do not represent profit to the lender.
📌 What Counts as Prepaid Closing Costs?
- Prepaid mortgage interest (from closing date to month-end)
- Homeowners insurance premium (often 6–12 months)
- Property taxes (depending on local tax schedule)
- Mortgage insurance premiums (if applicable)
- HOA dues (sometimes collected in advance)
These costs ensure your mortgage, insurance, and taxes stay current immediately after closing.
🧾 Prepaid Costs vs. Closing Costs
Many buyers confuse prepaids with traditional closing costs — but they serve different purposes.
| Prepaid Costs | Closing Costs |
|---|---|
| Cover future expenses | Pay for services & fees |
| Not lender profit | Paid to lenders, title companies, agents |
| Required for escrow setup | Required to close the loan |
See the full breakdown: Who Pays Closing Costs?
👤 Who Pays Prepaid Closing Costs?
Prepaid costs are almost always paid by the buyer because they cover the buyer’s future ownership expenses.
- Sellers typically do not pay buyer prepaids
- Seller concessions may offset them
- Cash buyers also pay prepaids (just without a lender)
Learn how sellers sometimes help offset these costs: Seller Concessions Explained
💰 How Much Are Prepaid Closing Costs?
Prepaid costs vary widely based on timing and location, but common ranges include:
- Prepaid interest: $100 – $1,000+
- Homeowners insurance: $800 – $2,500
- Property taxes: $500 – $5,000+
Buying near the end of the month usually reduces prepaid interest.
🏠 Prepaid Costs in FSBO Transactions
Prepaid costs work the same whether you buy from an agent or a FSBO seller.
- They appear clearly on the Closing Disclosure
- They are calculated by the lender and title company
- FSBO sellers are not responsible for buyer prepaids
Learn how FSBO closings work from start to finish: How Brokerless Works
⚠️ Common Prepaid Cost Mistakes
- Assuming prepaids are lender fees
- Not budgeting enough cash to close
- Forgetting taxes vary by county and timing
- Ignoring escrow requirements
Understanding prepaids early helps avoid last-minute surprises.
🚀 Buying or Selling Without Overpaying?
Brokerless helps buyers and sellers understand costs clearly — without commission pressure.