Buying a home is both an exciting and confusing experience. You are excited about the chance to own property when applying for a mortgage and deciding on where you want to live in South Florida. At the same time, there is a lot of red tape that may lead to frustration at the finish line.
You do not have to face the confusion that comes with closing the deal on your dream home in Broward County alone. An experienced real estate agent in Fort Lauderdale and the surrounding areas can help. Read on to learn about estimated prepaid items when buying a home.
What are Prepaid Costs?
As the term implies, prepaid costs are fees you must pay upfront to secure your home loan. You cannot roll these costs into your mortgage as they serve as an additional cushion for your lender.
The average first-time homebuyer in Fort Lauderdale may not have 20 percent to put down on a home. Those who take advantage of significant discounts reserved for individuals buying for the first time typically put down less than five percent of the asking price.
A lender needs some sort of assurance that things will not be a total loss if you fall into financial hardship. Such is the reason for prepaid costs.
Why are Prepaid Costs Important?
Prepaid costs on your new home in South Florida may include the following estimated prepaid items:
- Homeowners Insurance Fees
- Property Taxes
- Mortgage Interest
- Initial Escrow Deposit
These components are necessary for you to get off to a positive start as a new homeowner. Thus, all the elements that prepaid costs cover are important.
Homeowners’ insurance fees are usually paid upfront for the indemnity term. You can always choose to go with another provider after your first year as a new homeowner.
You also pay the estimated property taxes and mortgage interest in advance. Lenders typically require you to pay interest payments in advance to secure their investment further.
How Property Taxes Work
Property taxes paid upfront reduces the likelihood of a lien due to nonpayment. First-time homeowners are especially vulnerable to property taxes because they do not fully understand how the process works.
You are required to pay taxes on your home two times in the year. You run the risk of high late fees and default if you miss one of the two deadlines, even if you previously paid in full. Many veteran homeowners in Broward County pay assessed property taxes and what they estimate the new bill to be in the future. You may not be able to do such a thing in your first year of homeownership.
Securing your property taxes with funds from prepaid costs takes the burden of trying to immediately figure out the tax system in South Florida off your shoulders. You also need to pay upfront fees to secure your escrow account.
What is an Escrow Account?
Most first-time buyers in Fort Lauderdale who take advantage of discounted down payments have escrow accounts. In fact, a lender generally requires buyers who put down less than 20 percent to pay into such an account.
An escrow account provides a cushion to the lender by serving as a savings account for your mortgage. You pay into escrow every month along with your mortgage payment. The lender can always use your escrow account to cover a missed payment if you experience temporary financial hardship.
You are required to pay a lump sum of money into your escrow account before the deal closes for your home loan. You may not negotiate the amount, as determined by your lender, and you cannot break the lump sum into payments. It is essential to pay the prepaid cost to initially fund your escrow account without objection. Such shows stability to the lender and may cause the transition process to move quicker.
How Do You Calculate Prepaid Costs?
Those looking to get an idea of how much they will pay in prepaid costs for their new home in South Florida should do the following:
- Consider that prepaid costs cover at least six months of home insurance premiums. Most plans require individuals to pay for the year, which means you need to multiply your monthly payment by twelve.
- Understand that lenders require two months of property taxes as established by your local government. You can estimate how much you will pay by researching the homes near your property. Some individuals also assume their property taxes will be at least two percent of their home’s value. Under this principle, your new $500,000 home in South Florida would likely be assessed $10,000 in annual property taxes. You would need to pay about $1,700 upfront to cover the first two months.
- Take into account that interest rates can change from the date the loan closes through the end of the month. You will not pay for a month of interest on your loan if the deal closed on the 15th. Lenders only charge upfront interest fees from when your loan becomes active, which is after the account has officially opened.
Count Up All the Costs
Prepaid costs are not an option in home buying. You need to consider these fees as part of the purchasing process so that you are fully prepared to take on homeownership’s financial responsibility.
Need help finding a home in South Florida? Ensure you understand the importance of choosing an expert agent to help you navigate through the homebuying process. Contact Bello Real Estate for all your home buying and selling needs.