Prepaids are the costs of owning a home that the lender collects at closing before they come due. On a Florida purchase they're the first year of homeowners insurance, interest from closing day to the end of that month, and the opening deposit into your escrow account. They show in sections F and G of the Closing Disclosure, apart from the lender and title charges.
The three prepaids at a Florida closing
- Homeowners insurance for the first year. The full 12-month premium is paid at or before closing, so the policy is in force the day you get the keys.
- Prepaid interest. Mortgage interest is paid in arrears, so each payment covers the month before it. To bridge the gap at the start, you prepay daily interest from closing day through the end of that month. That's why the first payment isn't due until the first day of the second month after closing.
- The opening escrow deposit. The servicer starts your escrow account with enough to pay the next tax bill and insurance renewal on time, plus a cushion of up to two months. How many months it collects depends on when those bills fall.
Florida property taxes are paid in arrears, so the seller usually credits you their share of the current year's taxes at closing. That credit appears as its own line and offsets part of what you prepay.
A prepaids example
A buyer closes on the 20th of a 30-day month with a $295,000 loan at a 5.75% rate. Insurance is $3,300 a year ($275 a month), and taxes are $2,700 a year ($225 a month).
| Prepaid item | How it's figured | Amount |
|---|---|---|
| Homeowners insurance | 12 months × $275 | $3,300.00 |
| Prepaid interest | $295,000 × 5.75% ÷ 365 = $46.47 a day, × 11 days | $511.17 |
| Escrow deposit, insurance | 2 months × $275 | $550.00 |
| Escrow deposit, taxes | 3 months × $225 | $675.00 |
| Total prepaids | $5,036.17 |
The 11 days count the 20th through the 30th. Close on the 28th instead and prepaid interest drops to 3 days, or $139.41, a savings of $371.76 at the table.
Who can pay them
Prepaids can come from a seller credit within each program's limit: up to 6% of the price on FHA and USDA, 3% on Conventional with less than 10% down, and on VA, concessions of up to 4% of the home's reasonable value (VA counts prepaid homeowners insurance as a concession). On a $300,000 price, a 2% seller credit of $6,000 covers this entire list with $963.83 left toward closing costs. A gift from a family member can cover the rest.
The cash to close calculator adds prepaids to your down payment and closing costs for any price. To see how a seller credit or gift lines up against your total, call AAA Capital Funding at 888-601-8344.