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Smart people sometimes feel less-then-smart when reviewing a mortgage settlement statement for the first time.

It's not that the math is tough -- it's the lack of understanding about what you're looking at and what it all means.  Mortgage Math isn't taught in school, after all.

As a result, the first time that many people see a "live" settlement statement is on the day they buy their first home and that's a bad thing. 

Not understanding what your settlement statement says can make a closing go bad faster than Vantage Point did.

I've seen enough closings to know that the one settlement statement area that constantly throws homeowners for a loop are the sections collectively known as "Prepaid Items".

A "prepaid item" is exactly what its name implies -- payments related the home loan that are collected before the payment's actually due date.

Prepaid charges may apply in more than 10 categories, but the most common ones are:

• Advance mortgage interest paid from the closing date to month-end
• Real estate taxes paid into an escrow account
• Homeowners insurance paid into an escrow account
• Dues paid to a condo or homeowners association

These are not fees, per se.  They are costs. 

It's a subtle but important difference to recognize because prepaid items are not related to the process of getting a mortgage whatsoever; it's what distinguishes them from closing costs which, by contrast, are fees from lenders, title companies and governments related to the transaction itself.

Distinguishing prepaids from closing costs is not always so simple but one helpful way is to ask the question: "Is this a charge that I would have to pay anyway, even if I wasn't starting a new mortgage?"

If the answer is "yes", the charge is a prepaid item.

Taxes, assessments, interest -- these are due regardless and are classified as prepaid items.  Underwriting fees, title insurance, and transfer stamps -- these are due because of the new mortgage and, therefore, are classified as closing costs.