Pre-Paids and Closing Costs: Complicated Terms, Simple Definitions

Pre-Paids and Closing Costs: Complicated Terms, Simple Definitions

Realtors always negotiate the best terms of the contract on behalf of your clients.

I often see buyers who ask sellers to cover the closing costs. For example:

“Seller to contribute $X toward buyers closing costs, pre-paids, be used at buyer’s discretion.”

But do you know the difference between closing costs and pre-paids? Here are two simple definitions and why it’s important to include both items.

Pre-paids: At the closing table the lender usually collects funds for both property taxes and hazard insurance for an escrow account, so when the funds come due they can be paid on behalf of the borrower. Pre-paids also include daily interest incurred based on when the loan closes in the month.

Closing costs: Other fees and costs associated with obtaining the loan and purchasing real estate not included in the sale price. Fees include: city and state tax recording costs, appraisal, title company/attorney fees, and lender costs (ex: origination fees, administration fees).

Also, when you shop around for a mortgage, you should always consider closing costs.

I love talking with young people about financing options when they purchase a home. If you work with millennials who have mortgage-related questions, they can always call me at 757-490-4726 or email