What is an escrow account, anyway? 4 things to know.
What is an escrow account, anyway? 4 things to know
When you are purchasing a home, there is a bevy of new terms that are thrown your way. One of those terms is “escrow”. So, what does that mean exactly? The escrow account is a way to ensure that your tax and insurance payments are made on time.
When you are financing your home, the lender will create an escrow account. This account is used to pay your annual home owner’s insurance, mortgage insurance and property taxes. Doing this allows the lender to ensure that these annual (and mandatory) expenses are paid each year.
Here’s a quick summary of how it works:
During your closing process, a sum of money will be calculated and allocated to your escrow account. This money will “fund” the account, it will get it started. The calculation will be based on the date of your closing along with the amount of your annual taxes and insurance.
Each month you pay your mortgage, a portion of the payment will be deposited into your escrow account. This amount may change from year to year if either your tax amount or insurance premium changes.
When the payments are due, the servicer will send the payment to the appropriate party. Your annual payments will be made by a third party, you will not have to make the payments yourself.
You will receive a statement with detailing the amount of funds in your escrow account. If there is an overage you will receive a check in the mail totaling the amount specified. If there is a shortage you will receive a notification detailing how the shortage needs to be rectified.
The intent of the escrow account is to ensure that your tax and insurance payments are made on time. If you do not pay your taxes in a timely manner a lien may be placed against your home. If your home insurance lapses, the mortgage company may purchase insurance for you, this insurance option is most often more expensive than you purchasing on your own.
Also, when your homeowner's insurance lapses, your coverage does as well, meaning you’re no longer insured against things that may happen while you own the home.
These tips and more are found in the Brava Brokerage Home Buying Guide + Planner. Get yours today!