So, What Exactly is a Mortgage Escrow?

When it comes to property taxes, homeowners’ policy premiums, and any other miscellaneous fees that come with buying a house, no one wants to find that they’ve missed payments to the government.  Therefore, an escrow is an account that specifically exists to help borrowers accumulate the money for all of those taxes and fees—think of it as insurance for your insurance.

While not everyone needs to have one, some borrowers—particularly those who put less than 20% down and people with government insured mortgages backed by the FHA or Department of Veterans Affairs—are required to set one up.

HOW DOES IT WORK?

Escrows generally operate like a savings account; however, monthly deposit amounts are decided in advance when you sign your loan documents.  As your payments towards the account accrue in the bank—some states allow interest, while others don’t—the lender takes responsibility for paying your property taxes and insurance premiums.  Once you’ve paid your mortgage down to the 80% loan-to-value threshold, the account can be removed, but quite often, many borrowers prefer to keep it in place for the full term.

Still, if you’re in the beginning stages of securing a mortgage or searching for a house, you may be wondering what your monthly escrow payments will be since it’s probably tied to what size home you can afford.

Frankly, it can be difficult to know how much your payments will be when you’re going into a loan; however, sellers are often willing to volunteer to show their most recent tax bill or you can usually get the information through the county government.  You may not have the exact number that you’ll wind up paying, but at least you’ll be in the ballpark.

YEARLY RECALCULATIONS

Since lenders never know with 100% certainty that there won’t be a tax hike in your area, your escrow payments are subject to recalculation at the end of 12 months.  Generally speaking, at the end of the year, lenders will do an escrow analysis, which will compare what they told you would happen and what actually happened.  To cover the possible variations, you’ll often be required to maintain an extra month or two of payments in your account and be ready for possible payment adjustments; however, it’s important to note that, oftentimes, these annual shifts only lead to a mild stir in a homeowner’s budget.

PAY ATTENTION

The beauty of an escrow account is that it often allows the homeowner to be pretty hands-off; however, the customer still needs to be proactive.  In the event of a loan sale, the escrow account will generally transfer—with the mortgage—to the new lender, but with so much paperwork involved, mistakes can happen.

In the end, although it’s obviously important for buyers to understand how the mortgage process works, it’s also important for them to be aware of their escrow options.  Purchasing a home is a major financial decision and while it’s crucial to have an experienced lending professional in your corner, it’s also quite helpful if you have an idea of where your hard earned money is going.

Pamela Wright | OnQ Financial | www.onqfinancial.com | 404-445-1033