While escrow accounts have now become synonymous with the important home closing process, not many people are really familiar with their intricacies. If you are a first-time homebuyer, there is no doubt that during the home buying process, you will frequently hear the term “escrow.”For as crucial as escrow is, we can bet that just the mention of an escrow account often conjures up more questions and complications than answers.
Have you been planning to purchase a house for a while? If so, you have likely budgeted for your monthly mortgage payments. However, did you budget for additional costs, such as insurance and property taxes?
Note that to cover these costs, many homebuyers in the US deposit funds into a mortgage escrow account. Note that these payments could be a part of your monthly mortgage payment. You should take a closer look at how a mortgage escrow works and learn when you would need it.
What is Escrow Payment?
We can define escrow payment asa term that refers to a specific portion of your mortgage payment that pays for real property taxes as well as homeowners’ insurance. So, escrow payment is an amount “over and above” the loan principal and interest portion of your mortgage payment.
Why do I Pay Escrow on My Mortgage?
In most cases, you will have to escrow on your mortgage. This is because it helps protect the lender’s investment. You should know that mortgage lenders need borrower escrow accounts to lower the risk that you will fall short of your monthly financial obligations as a new homeowner.
You may know that in a foreclosure, unpaid insurance or taxes often result in liens. This makes it harder for mortgage lenders to recover their original loans.
It is worth noting that if you fall behind on your insurance or property taxes, you may have a lien on your new home — and then eventually lose it. It is no secret that lenders do not like it when somebody else has a legal claim on your (or their) property. Also, keep in mind that if your insurance lapsed and the home was severely damaged, it would jeopardize your lender’s investment.
What is Escrow Shortage?
You may have heard of the term escrow shortage. It represents the amount by which your current escrow account balance falls short of your target balance.
How does a Mortgage Escrow Work?
It is worth noting that a mortgage escrow account is a special holding account for your homeowners’ insurance premiums and property tax payments. In most cases, you will not have to pay these bills from the escrow account.
Rather, it is your mortgage lender who will collect these payments monthly as part of your mortgage payment. Note that the money will accrue in the escrow account, and once you have reached twelve payments, your mortgage lender will pay your yearly insurance bill and property taxes for the next year.
By securely holding your homeowners’ insurance and property tax payments in escrow, your mortgage lender ensures the timely payment of these bills. This helps avoid penalties, such as late fees or a potential lien against your property.
Do you get Money Back from Escrow?
You make escrow payments for property taxes and insurance. The only way you can get some of the money back is when you sell your home. Otherwise, you don’t get back the payments you made for property taxes and insurance.
Who Pays Escrow Fees Buyer or Seller?
Did you know that costs or fees for escrow services are pretty detailed, along with other fees? You will find them in the Loan Estimate and Closing Disclosure. Note that escrow fees are often known as settlement agent fees.
It is worth mentioning that in some housing markets, seller and buyer split escrow fees. In contrast, in other places, the buyer or seller may solely pay these fees. However, regardless of any local custom, you can negotiate who pays which fees.
Is Escrow a One-time Payment?
Note that your insurance premiums and tax bill can change considerably from year to year. And your servicer will usually determine the number of your escrow payments for the following year depending on what bills they paid the last year.
However, you may get an option to make a convenient one-time payment or even increase the amount of the monthly mortgage payment in order to make up for any shortage in the escrow account.
Is an Escrow Account Optional?
In most cases, opening an escrow account is mandatory. It is likely not optional if you have put a down payment of less than 20% on your home. For example, USDA loans and FHA loans require an escrow account, but VA loans don’t.
How do I Check my Escrow Balance?
There are several ways to check your escrow balance. For example, you can view your escrow account balance by reviewing your statements. You can also call your bank or lender or even check your escrow balance online, which is convenient.
How can I Reduce my Escrow Payment?
You can reduce the escrow portion of your payment by shopping around for new homeowners’ insurance and save money. Also, you might be able to lower your escrow payment by managing your account more aggressively. Note that by law, your mortgage lender can only keep a 2-month cushion in the escrow account. So, if you think it is taking too much money from you, you can request an escrow analysis.
Final Thoughts
As you can see, escrow considerably simplifies the home buying experience. This is because, without it, you would be responsible for sending accurate and timely payments to various parties involved in the transaction. With answers to common questions, such as what is escrow payment and how does a mortgage escrow works, you will be able to make a sound decision.
Note that lenders and servicers usually handle the details of your escrow funds. However, as a homeowner or a first-time homebuyer, it is crucial that you work with a reliable mortgage adviser and ask questions about anything that you are not clear about.
