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What are prorations in real estate?

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How much should you really pay for mortgage interest, property taxes, or HOA dues when buying houses for sale in Ewing, NJ? Knowing how real estate proration works will help you make the right financial choices.

A closer look at prorations in NJ real estate

Generally speaking, proration refers to the distribution of a chunk amount to smaller monthly payments due. Proration often comes in the form of monetary incentives and is used widely within real estate transactions.

Seller and buyer proration is a common practice in real estate. Proration is stated in the form of credits and debits in the closing statement to help ensure that both parties pay their fair share of property costs. Proration allows buyer and seller to work out how to share the costs associated with homeownership when the property gets sold during a specific month and year. This means that each party will only pay for costs incurred during the time that they owned the property..

For instance, the purchase contract may contain provisions for prorations. So before you sign the purchase contract, make sure you understand exactly how proration will be handled and determine whether you’ll need to have certain verbiage changed to protect your interests. The amount of credit or debit due largely depends on when homeownership costs are paid in the property’s location.

Types of prorations

Real property tax prorations

It’s important to discern whether your closing fees include prepaid taxes. If taxes are prepaid, the seller will receive credit and the buyer will get charged. The reverse will take place if taxes are not due and payable—the seller will get a debit proration while the buyer gets a credit proration.

In situations where taxes are not immediately due and payable, taxes will be due if the closing date nears the usual date for tax collection. The one closing the deal will pay taxes using the seller’s proceeds then credit the remaining amount to the seller and charge the buyer as necessary.

Mortgage interest prorations

Mortgage interest is typically paid in arrears. This means that if you make a mortgage payment on January 1st, it pays off mortgage interest from December of the previous year.

On a new mortgage, lenders customarily collect interest about 30 days before your first mortgage payment is due. This means that if you close the sale on November 15th, your first monthly payment is due January 1st. Borrowers are typically charged 15 days’ worth of interest on their closing statement covering November 15 to 30.

Sellers would then owe interest for November 1 to 15 because they are required to pay interest in lieu of a loan payoff. In this scenario, the seller and buyer will have a prorated debit charged to their respective accounts.

Homeowner association (HOA) dues prorations

If the seller has yet to pay HOA dues, the amount will be taken from the proceeds of the sale and the seller will receive credit for the remaining portion. For instance, if HOA dues cost $300 per month, daily proration is $10. If the transaction closes on the 10th, the seller will shoulder $100 in HOA dues while the buyer will shoulder $200.

Other common types of prorations include:

  • Utility prorations
  • Insurance prorations
  • Rent prorations

For more information on the real estate process in Ewing, NJ and the surrounding areas, call David DePaola and Company Real Estate at 609.883.4161 or send an email to David(at)DePaola(dotted)com. We are a premium boutique agency with deep roots in the community. Our team is ready to assist you.