April 19, 2021
All About Escrow Accounts
If you’re in the market for a new home, you might have heard the term “escrow” thrown around here and there. Let’s take a deep dive into what escrow accounts are, how they work, and how they can benefit you.
What is an Escrow Account?
When you have a mortgage, you also have an escrow account. This type of account acts as a savings account. These accounts are set up in order to hold money to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other items. Each month a portion of your mortgage payment is deposited into your escrow account to ensure that these items are paid in a timely fashion. They also guarantee that there will always be enough money to pay these bills when they are due.
Escrow accounts are established at the time of closing on your property. Enough money will be collected by your lender to begin the account. From that point forward a portion of your mortgage payment will be placed into this account for your lender to use to pay taxes and homeowners insurance bills.
How Escrow Works As a Homeowner
Escrow accounts allow pressure to be taken off of the homeowner to come up with larger sums of money to cover the cost of insurance and taxes. These accounts create a system in which you are able to pay over a period of time, instead of all at once, which is a more manageable way to cover the costs.
Another benefit of these accounts is that the responsibility is taken off of the homeowner and placed onto the mortgage company. Homeowners don’t have to worry about whether or not there will be enough money in the account or being late on making payments. Lenders handle all of the details, and will even cover bills if escrow accounts are short on needed funds.
When purchasing your home, your real estate tax and homeowners insurance bills amount will be estimated by your mortgage servicer, and each year is analyzed to ensure that the right amount is being paid to cover the costs of the bills.
Benefits of Escrow Accounts
Escrow accounts offer a variety of benefits, such as:
- Automatic payments that homeowners don’t have to worry about, so there is no fear of penalties or late fees.
- Typically if there are shortages in the account they are covered by the lender. As the taxes and bills fluctuate, there might be a shortage of funds in the account. These can be covered temporarily to make up the difference.
- Mortgages have lower rates and down payments. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.
An escrow account is a common tool that is used by mortgage companies to ensure that your obligations as a homeowner are met. Having one of these accounts account can offer peace of mind and a convenient solution for paying taxes and insurance.
As always, let our team at Method Mortgage lead you to the smartest way home! Give us a call today!