What is an Escrow Account ?
Your lender may suggest that you set up an escrow account. In fact, most mortgage companies require an escrow account for mortgages with less than a 20 percent down payment or those with a lower loan-to-value ratio, unless the borrower is willing to pay a higher interest rate.
An escrow account helps you:
Manage your budget with monthly tax and insurance payments instead of an annual lump sum payment
Gain peace of mind knowing your payments will be made, on time, on your behalf
Meet your lender’s requirements by ensuring that your home is protected with paid-up insurance coverage and taxes
An escrow account is defined as a trust account held in the borrower’s name to pay obligations such as property taxes and insurance premiums.
Your monthly mortgage payment includes an amount for property taxes and insurance in addition to the amount you owe for principal and interest. Your mortgage company will place the amount of your monthly payment that is for taxes and insurance into an escrow account. The funds can be used only to pay taxes and insurance on your behalf. Your mortgage company pays the taxes and insurance bills for you when they are due. Your mortgage company examines any changes in your tax and insurance costs (for example, your local government may change the amount of your real estate taxes). Each year, your mortgage company sends you a statement showing the activity for the prior 12 months-amounts collected from you and placed in escrow as well as the payments made on your behalf-and showing any adjustments that may be needed based on changes in your tax and insurance costs.
A simplified example* of how escrow payments are calculated
Annual real estate taxes: $1,800 divided by 12 months= $150 per month
Annual property insurance: $720 divided by 12 months= $ 60 per month
Total monthly taxes and insurance: $210
In this example, $210 would be added to your total monthly mortgage payment and applied to your escrow Account. You might hear your total monthly mortgage payment referred to as your “PITI” – for principal, interest, taxes and insurance.
*The amounts you owe for real estate taxes and insurance will vary- this is a simplified example, and your mortgage company will likely use a more detailed calculation method that considers various factors. Ask your lender for a full explanation and an estimate of the escrow payment for your mortgage.
If you have a mortgage but are not sure if you have an escrow account, check your monthly mortgage account statement or contact your lender. Your account statement will typically indicate your “Escrow Balance” and the amount of your total monthly mortgage payment that is applied to escrow.
For more information, talk with your mortgage company to determine if you are setting aside adequate funds in your escrow account or if you should set up an escrow account.
Information provided by Thomas J. McGroder, ABR, GRI, Thomas J. Real Estate, Inc. Licensed Real Estate Broker, Registered HUD Broker. To contact us call 518-863-4691, e-mail homes@thomasjrealestate.com http://www.thomasjrealestate.com
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