Prepaid Taxes

When a mortgage lender sets up an escrow account for property taxes, they typically collect a portion of the upcoming tax bill at closing, before the first monthly mortgage payment is even due. These upfront funds are called prepaid taxes.

The amount collected depends on when in the tax year the closing takes place and how the local tax schedule is structured. A buyer closing partway through a tax period may need to contribute more or less depending on those variables. The lender uses this upfront cushion to ensure the escrow account has sufficient funds to pay the tax bill when it comes due.

This is separate from a tax proration, which accounts for the portion of the tax period each party owned the home.

Prepaid taxes are part of your cash-to-close amount and can represent several months of property tax payments depending on timing and local tax rates. Because the amount varies based on your specific closing date and the local tax schedule, it isn't always predictable until you're close to closing.

Your Loan Estimate will show an estimated prepaid tax amount based on the anticipated closing date. The Closing Disclosure, provided at least three business days before closing, shows the confirmed figure. Prepaid items are one area where the final amount can shift from the initial estimate.

A buyer closes in March. Local property taxes are paid once annually in the fall, covering the full calendar year. The lender collects three months of estimated property taxes at closing to seed the escrow account, ensuring there are funds available before the fall bill arrives. Each month's mortgage payment will also include a property tax contribution into escrow going forward.

"Prepaid taxes and property tax prorations are the same thing."

They're related but distinct. A proration divides the current tax period's taxes between buyer and seller based on how long each owned the home during that period, settling the debt each party owes for time already passed. Prepaid taxes are funds collected upfront to establish the escrow account the lender will use to pay future tax bills. A single transaction can involve both, and both will appear on the Closing Disclosure if applicable.