💸 Escrow, Prepaids & Closing Costs: What’s the Real Difference?

Your mortgage payment is more than just principal and interest—it also funds your taxes and insurance through escrow. To get that started, lenders collect prepaids at closing: your first year of homeowners insurance plus a cushion of taxes and insurance. Together, escrow and prepaids make sure your home is covered and your bills are paid on time.

But here’s where it gets confusing: these items usually appear in the same column as your closing costs, even though they’re not really fees. They’re normal expenses of owning a home—you’d be paying them anyway. The only difference is that they’re collected upfront to make your escrow account work smoothly with your new mortgage.

🤔 What is an Escrow Account?

It’s your lender-managed account for property taxes, homeowners insurance, and sometimes mortgage insurance. Each month, part of your mortgage payment goes into it. When those bills come due, your lender pays them on your behalf.

💸 Enter the Prepaids

At closing, you’ll see “prepaids” listed in your costs. These include:

• First 12 months of homeowners insurance: Paid upfront to guarantee coverage from day one.

• Set-asides for escrow: Several months of taxes and insurance collected upfront to cushion the account. This ensures enough funds are ready when the first bills hit, since due dates rarely line up perfectly with your closing date.

⚙️ How It All Works

1. You pay your first year of insurance at closing.

2. Your lender seeds the escrow account with a few months of taxes/insurance.

3. Your monthly mortgage payments add to escrow.

4. The lender pays your bills on time.

5. Each year, your lender runs an escrow analysis.

📊 The Escrow Analysis: Why Payments Change

• Timing: Each loan’s escrow analysis happens annually, but not on the same calendar date—it depends on your loan’s schedule.

• If there’s extra: You’ll usually get a refund check for the surplus (if it’s over $50).

• If it’s short: You have two options:

  • Write a one-time check to cover the shortfall.

  • Spread it out: Your lender can divide the shortfall over the next 12 months, slightly increasing your monthly payment.

• The takeaway: If your mortgage payment changes, this is typically why. Always review the annual escrow notice carefully so you’re not caught off guard.

💵 Closing Costs vs. Prepaids

People often lump your prepaids into the overall closing costs. However, closing costs and the prepaids are two different things. Here’s the difference:

• Closing costs: One-time fees tied to getting the loan (like appraisal, title, origination, recording fees).

• Prepaids & escrow: Ongoing homeowner costs (insurance and taxes) collected upfront to fund your escrow account.

👉 Think of it this way: closing costs are the “price of admission” to get the loan, while prepaids are simply homeowner bills collected early to make sure you’re covered.

🐼 Mama Bear’s Bottom Line

Escrow accounts and prepaids may look like extra “closing costs,” but they’re really your regular homeowner expenses—just collected early to make sure your mortgage runs smoothly. The annual escrow analysis keeps everything balanced, and if your payment changes, it’s usually because of tax or insurance adjustments. The goal? Peace of mind that your biggest bills are handled for you.

📌Ready to make sense of prepaids, escrow, and closing costs? Reach out today and let’s build your game plan.