What is Escrow?
An escrow account is a special account used to set aside a portion of your monthly mortgage payment to cover property-related expenses such as property taxes and insurance premiums (including homeowners, flood, or private mortgage insurance). Your monthly mortgage payment is divided into two parts:
- Principal and Interest: One part goes toward paying down the principal balance of your loan and the interest charged by the lender.
- Escrow Account: The other part is deposited into your escrow account to cover property taxes and insurance premiums.
When these taxes and insurance premiums are due, funds from your escrow account are used to pay the bills, ensuring that these essential expenses are always covered on time.
How Does Escrow Work?
Let’s break down the escrow process step-by-step:
- Projection of Annual Expenses: We estimate your annual property tax and insurance amounts and divide these costs by 12 to determine the monthly amount needed.
- Monthly Mortgage Payment: This monthly amount is added to your mortgage principal and interest to form your total monthly mortgage payment.
- Depositing Funds: Each month, a portion of your payment is deposited into your escrow account.
- Bill Payments: When your property taxes and insurance premiums are due, we use the funds from your escrow account to pay these bills on your behalf.
- Annual Review: We review your escrow account annually and send you a statement to ensure that the account balance covers any changes in tax or insurance costs.
How Do We Know How Much to Pay?
We receive copies of your property tax bills and insurance premiums directly from your local tax office and insurance companies. This allows us to know the exact amounts and due dates, ensuring timely and accurate payments.
Why Do I Need an Escrow Account?
Escrow accounts are typically required if your down payment was less than 20% of the home’s purchase price. However, even if not mandatory, having an escrow account offers several benefits:
- Convenience: It simplifies the payment process for property taxes and insurance premiums, saving you from managing these large, periodic expenses.
- Financial Management: By spreading these costs over 12 months, it makes budgeting easier and helps avoid large, lump-sum payments.
- Protection: Ensures timely payments, protecting you from potential penalties, late fees, or lapses in insurance coverage.
Benefits of an Escrow Account
- Simplified Payments: No need to remember multiple payment due dates for taxes and insurance.
- Avoid Penalties: Ensures payments are made on time, avoiding penalties and lapses in coverage.
- Budgeting Ease: Makes it easier to manage your finances by spreading out large expenses over monthly payments.
By understanding how escrow works and the advantages it offers, you can better manage your homeownership responsibilities and ensure that critical payments are handled smoothly and efficiently.