What Is Prepaid Items?

Prepaid items are expenses you pay at closing to cover costs that will come due before your first regular mortgage payment. They typically include your first year of homeowners insurance, several months of property taxes, and per-diem interest from your closing date through the end of that month. These are separate from your recurring monthly escrow payments.

On a $350,000 home closing on March 15, your prepaids might include $1,800 for a full year of homeowners insurance, $2,400 for 3–6 months of property tax reserves, and roughly $475 in per-diem interest (16 days at ~$29.70/day on a 6.5% rate). In total, prepaids often add $3,000–$6,000 to your closing costs.

Key Facts

• Homeowners insurance: Typically 12 months paid upfront, averaging $1,500–$2,500 annually
• Property tax reserves: Usually 2–6 months held in escrow at closing
• Per-diem interest: Daily interest from your closing date through the end of the month
• Not a fee: Prepaids cover your own future expenses, not lender charges
• Shown on Closing Disclosure: Listed in Section F of your Closing Disclosure form

Frequently Asked Questions

Are prepaid items the same as closing costs?

Prepaid items are part of your total closing costs, but they are not lender fees. They cover your own future expenses like insurance and taxes. Your Loan Estimate and Closing Disclosure separate prepaids from origination charges and third-party fees.

Can I reduce the amount I pay in prepaids?

You have limited control. Closing earlier in the month reduces per-diem interest charges. Shopping for homeowners insurance can lower that prepaid amount. Property tax reserves are set by your lender based on local tax schedules.

Why do I pay interest at closing if my first payment isn’t due yet?

Mortgage interest is paid in arrears. Your per-diem prepaid interest covers the gap from your closing date to the end of that month. Your first full mortgage payment, typically due the following month, covers the prior month’s interest.