Humber/Ontario Real Estate Course 3 Exam Practice

If the seller prepaid $1,000 for home insurance and the sale closes on February 15th, which statement is correct about closing adjustments?

1. No adjustment is made as insurance is not transferable

2. Seller receives a credit for the prepaid amount from February 15th to December 31st

3. Seller’s share is $123.29 and the remainder credited back

4. Seller gets credited for the full $1,000 since it was prepaid

5. Insurance payments are split equally between buyer and seller

6. Payment differences are not calculated at closing

The correct answer is: Seller receives a credit for the prepaid amount from February 15th to December 31st

The correct statement is that the seller receives a credit for the prepaid amount from February 15th to December 31st. When a seller prepays for home insurance, it is important to account for the period after the closing date, in which the buyer will benefit from that insurance coverage. At closing, the seller is typically credited for the portion of the insurance that covers the time they will no longer own the property. In this case, since the sale closes on February 15 and the insurance was prepaid for the entire year, the seller should receive a credit for the days from February 15 to December 31. This represents the time frame in which the buyer will be using the insurance without having to pay for that coverage. This adjustment ensures a fair distribution of the prepaid expense between the seller and the buyer. The buyer will assume ownership of the insurance benefits for the remainder of the year, warranting a credit to the seller for that period. Thus, the accurate understanding highlights how such costs are prorated during the closing process, maintaining fairness in the transaction.