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Dana F. Williams
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dana@adlmortgage.com
Prepaid Items And Reserves

Prepaid Items and Reserves are not listed as closing costs, but are expenses that you may incur in connection with a home purchase or refinance.  They are however part of the total Settlement Costs and part of the total amount of money you will need to bring into escrow to close your loan.  The following items are included in the total amount of funds you will need:

Interest per day: Interest due the lender for each day's interest accrued after the loan funds and until the first payment is due.  For example: If the loan funds on May 15 and if your first payment is due July 1, you will owe interest from May 15 to May 31. July’s payment will cover June’s interest.

Mortgage Insurance Premium (PMI): Insurance required for when the borrower's down payment on the house is less than 20% of the purchase price or the equity is less than 20% on a refinance.  PMI is a policy that fulfills the obligations of a mortgage when the policy holder (borrower) defaults or is no longer able to make payments.

Hazard Insurance Premium: Purchases require 12 - 14  months.  This insurance covers replacement costs for damages caused by fire, wind or other disaster that might affect the value of the property. Typically, the insurance also includes personal liability and theft coverage.  Usually collected by the escrow company and then impounded by the lender. Many Lenders also require a buffer of two months in case insurance premiums go up.  

Taxes and Assessment Reserves: Usually collected by the escrow company and then impounded by the lender.  Property taxes are prorated between the buyer and seller for the months of taxes due.  Many Lenders also require a buffer of two months in case taxes go up.  Taxes are payable in April and October and lag by 6 months.

Flood/Quake Insurance Reserves: Additional hazard insurance coverage that is required for homes located in a designated hazard zone as established by the Federal Emergency Management Agency (FEMA). The Lender will determine if the additional insurance is required.

Not all lenders require you to have an impound/escrow account, but some lenders will charge a one time fee if you decide not to have one.                                                                                                                                                                        
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