Fees collected as closing costs that will recur throughout the life of the loan.
Pre-Paid Costs or Fees are commonly referred to as “pre-paids” because they are collected as closing costs and will recur throughout the life of the loan.
At closing, pre-paid interest is collected as a closing cost. It collects mortgage interest from the day the loan funds through the end of the month; this is because mortgage interest is paid in arrears. For example, if you close your purchase in October and your first mortgage payment is due in December, that first December payment will only collect for the interest accrued in November; however, it does not account for the partial interest you accrued in the October. The prepaid interest at closing will therefore collect for that partial October amount. After closing, you will still pay normal mortgage interest every month with your mortgage payment.
At closing, pre-paid homeowner's insurance is collected as a closing cost. It collects the annual homeowner's insurance premium. The full year is collected upfront because insurance must be paid in advance for future coverage (i.e., the home must be insured for the first year at the time of closing). Insurance cannot work retroactively, so payment is required upfront for the full policy period. After closing, you will still pay homeowner's insurance either every month with your mortgage payment (if your account is impounded) or the following year once the renewal premium comes due.
At closing, pre-paid property taxes are collected as a closing cost. They must account for whichever property tax bill is currently due. If applicable, the tax bill will be prorated accordingly between buyer and seller; this means that the seller will only pay for those property taxes incurred while they technically still owned the home, and the buyer will only pay for those taxes incurred while they will own the home. After closing, you will still pay property taxes either every month with your mortgage payment (if your account is impounded) or once the property tax bill comes due (semi-annually, quarterly, or annually, depending on state).