PRE-PAID INTEREST:

If you close at the end of a month, say August 31, you will pay any closing costs and down payment at closing. You will NOT have a mortgage payment due on September 1, and your first mortgage payment will be due October 1. You actually pay interest on your loan balance a month in arears (a month behind). If you close on any date other than the end of the month, your bank will charge “pre-paid interest” for the extra days in which you have borrowed money. For example, if you close on August 15th, at closing you will still pay any closing costs and down payment at closing. You will also pay interest on the loan balance from Aug 15-31st, this is the pre-paid interest. Then, you will still have no mortgage payment due September 1st, and your first payment will be due October 1st. Banks do this so that you are on a regular billing cycle. It is not a fee or penalty, but simply paying interest on the money you are borrowing starting on the closing date. This is in addition to the typical closing costs detailed in the spreadsheet.

TAX ESCROW:

Many times banks require you to escrow your taxes. Taxes in Cook County are billed in 2 installments each year (March 1st and August 1st). Because the County can make claims on property and/or include the property in tax auctions if a homeowner fails to pay taxes, the bank often times decides to ensure that taxes are paid to secure the loan. Each month that you pay a mortgage payment, your bank will include an escrow amount to be due as well. If your expected tax bill is about $2,400/year, the bank will require you to escrow about $200/month. Each month, they collect this money and keep it in an account for your benefit, showing you the amount held in the escrow account on each statement. When the tax bill comes due, they will pay it with your money (it is still a good idea for you to look up on CookCountyTreasurer.com to make sure it got paid correctly). At closing the bank will likely require you to make an initial deposit to your tax escrow account, this will depend on the closing date and time until the next tax payment is due.

For example, let’s say you were closing on January 1st. The next tax bill will be due on March 1st. As discussed above in “pre-paid interest”, if you close January 1st you won’t be paying your first mortgage payment until February 1. If your tax bill is about $2400/year, your escrow payment on February 1 would be about $200. Now, the tax bill is due March 1st and the bank would only have $200 to pay your tax bill (which will be about $1200 for the 1st installment, half of the expected $2400/year bill). Therefore, at closing, the bank will require a tax escrow to be started. They will calculate how much money they will have in escrow come the next tax bill due date and require you to pay the difference at closing so they can pay the next tax bill when it comes. In this example, they will probably ask for about $1000 (since they will need about $1200 and will only have $200). This is in addition

to the typical closing costs detailed in the spreadsheet. NOTE, this amount is usually offset by more than enough from the seller’s tax credit to the buyer, as discussed on the Cook County Tax Information handout enclosed in our buyer’s packet. (If you chose a loan without a tax escrow, you will simply pay your taxes when they are due directly to the County, no monthly or initial escrow deposit are needed.)