Prepaids vs. Closing Costs

Written for Louisiana Mortgage Handbook by Chasity Graff, Mortgage Broker/Owner of LA Lending, LLC.

Last reviewed: 2026-06-24

Quick Answer

Closing costs are the fees and charges to complete the loan and transaction. Prepaids are items paid in advance, such as homeowners insurance, prepaid interest, and taxes or escrow deposits.

Both can affect cash to close, but they are not the same type of cost.

Why Prepaids Confuse Borrowers

Prepaids can feel like closing costs because they are collected at closing.

But many prepaid items are not fees. They are future costs being paid upfront or collected to set up the escrow account.

Common Prepaid Items

Common prepaid items may include the first year of homeowners insurance, prepaid interest from closing to the end of the month, property tax collections, and escrow deposits for taxes and insurance.

The amounts depend on the closing date, insurance premium, property taxes, escrow setup, and lender requirements.

Why the Closing Date Matters

The day you close can affect prepaid interest and escrow collections.

That does not always mean one closing date is automatically better than another. It just means timing can change the way money is collected at closing.

My Thought Process

When I review cash to close, I separate true fees from prepaid items so the borrower understands what is actually being charged versus what is being collected for future bills.

That makes the closing disclosure easier to read and much less frustrating.

Common Mistakes

Assuming all cash to close is lender fees.
Forgetting the first year of homeowners insurance may be collected.
Not realizing escrow setup can increase cash needed.
Comparing two estimates without checking whether taxes and insurance are the same.
Thinking prepaids are optional when the loan requires them.

Bottom Line

Prepaids are not the same as closing costs, but both affect cash to close.

Understanding the difference helps you read loan estimates and closing disclosures more clearly.

Educational Note

Educational note: This page is meant to explain the mortgage process in plain English. It is not a loan approval, commitment to lend, rate quote, or legal/tax advice. Mortgage programs, pricing, payments, documentation requirements, and guidelines can change. Final approval depends on credit, income, assets, property approval, appraisal, title review, underwriting review, lender guidelines, and approved credit.