One of the terms that is often used in the mortgage business, especially during the closing of a mortgage loan is “Escrows” or “Escrow Account”. An escrow account, sometimes called an impound account, allows you to pay the homeowners insurance and property taxes on your home. It’s important that your taxes are paid on time and in full to the county tax assessor to avoid penalties and tax liens. Essentially, every month the deposit amount for your escrow account will be added to your total mortgage payment. This deposit amount that will go into and build up your escrow account is determined based upon your insurance premium and your annual property taxes. The exact amount will be calculated at the closing of your mortgage loan. You may be wondering, “Why is the deposit for my escrow account added to my mortgage payment by my lender, instead of my lender giving me the freedom to pay it on my own?” The answer to that is simple. It’s for your own protection. Countless homeowners and new homeowners in particular have trouble keeping up with their taxes and insurance. Your lender adds your escrow account payment to your mortgage payment to ensure that every month there is money deposited into the escrow account.
Escrow Accounts Details
Like we discussed earlier, your taxes need to be paid in order to keep away penalties from the county. Your insurance needs to be paid so that in the event of a fire or natural disaster you will have coverage for the repairs. By having money deposited into your escrow account when you make your monthly mortgage payment, you ensure that your escrow account will be padded with cash when it comes time for your taxes and insurance to be paid. Some mortgage banks require that an escrow account be established if you as the borrower have made a down payment of less than 20% of your loan amount. Your escrow account is held by a third party, usually an escrow officer or title agent, so you never have to be concerned with whether or not your payment will be applied to correct account. Your escrow officer will handle all of the payments and paperwork for you.
We went over a lot in this article, so let’s review.
- Your escrow account is (metaphorically) a tank or a safe. When you make your monthly mortgage payment, a portion of it is taken out and put into your escrow account.
- The money in your escrow account is then used to pay your property taxes and homeowners insurance.
- Your escrow account is usually set up by your real estate agent or your mortgage lender.
- Having money in your escrow account is important for you as the borrower to keep away fines and delinquent tax fees