First time home buyers get a lot of different terms thrown at them during the home buying process.
Phrases like “pre-qualified”, “conventional loan”, “inspection and appraisal”, “replacement cost home insurance”…the list goes on and on.
One of those terms that usually pops up along the way is when your mortgage lender lets you know they will be establishing an “escrow” account for you…
A what? An “Escrow” Account?
An escrow account can be a great way to help simplify the process of combining common and required expenses associated with buying a home. So, what exactly is an escrow account? It consists of the amount you owe for:
1.) Your Mortgage Payment
Once you have been pre-qualified by the bank and successfully had your offer accepted, you will work with your mortgage lender to determine the terms of your loan and get an idea of what the monthly payment for the loan will be. Your mortgage lender most likely let you know you would be making payments each month for the home loan, so this shouldn’t really be a surprise.
2.) County Taxes
The second expense that is tied up into your escrow account is the amount that you are required to pay to the county you will be living in for taxes. This amount is based on what amount your new home is being valued at by your county assessor. You will most likely receive statement twice a year from the county assessor (typically in May and September when the payments are made by the bank). As part of your monthly escrow payment, you will repay the lender for the amount they paid to the county for this expense.
3.) Homeowners Insurance
Typically, once your have chosen the company for your home insurance, your agent will work with your mortgage lender to provide them the annual amount of your insurance premium, which in many cases will be paid by the lender. You will then repay the insurance premium to the bank on a monthly basis as part of your escrow payment.
Changes In Your Escrow Account
Once escrow accounts are established, your payments are usually established for the first 12 months.
After the second or third year, there may be an adjustment when the escrow account renews. While the mortgage payment for the loan will remain the same (unless the terms have changed), there may be a change in the taxes owed or home premium due, or both.
Your mortgage lender may let you know at that time your escrow account is “short”, and you need to either make a lump sum payment to get the account current, or they can spread the payment out over the next 12 months by increasing your monthly payment.
An escrow account being “short” is likely this way because the prior years taxes were not accurate, or there was an increase in the home insurance premium, or a combination of both.
In the midst of the storm that is buying a house, getting an escrow account established can be a nice way to keep things simple. The process from getting pre-qualified to closing can be overwhelming.
After closing, you have to get moved in, unpacked, and get started on those home projects you have been thinking about since your first walk through.
Once you have been in your new home for a couple years, and have time to learn more about the home payment, the taxes associated with your home, and the insurance, you can then determine if you want to stay with an escrow account.
If you feel like you would be better off to set aside funds to pay the taxes, and pay for the insurance on your own, you can talk to your lender about making some changes to your account. Or, you can just monitor the taxes and insurance and make adjustments as needed during the life of your loan.
So there you go. Hope this helps make “Escrow” a lot less scary than it sounds.
I just wish I could do the same with the word “taxes”…