This is what you need to know about escrow– Mortgage Escrow Account-A Guide
When you purchase a home, you will hear the term “mortgage escrow account” thrown around. But what exactly is it, and why does it matter? This guide will provide an overview of what mortgage escrow accounts are, how they work, and why they are important for homeowners. Whether you’re a first-time homebuyer or simply unfamiliar with this aspect of homeownership, this guide will help you understand the basics.
Table of Contents
Table of Contents
What is a Mortgage Escrow Account?
A mortgage escrow account is a separate account that is set up by your mortgage lender. The account will hold funds for the payment of property taxes, homeowners insurance, and MI (Mortgage Insurance-insurance that is to protect the lender if a default occurs when the loan to value is greater than 80%). Flood insurance (if applicable), and ground rent (if applicable) are also a part of needed escrow deposits.
Most lenders base their guidelines on what the GSEs require. (FNMA, Freddie Mac, etc.) Therefore, They do not normally require property insurance or flood/escrow account for condos, Co-ops, or PUD properties. This is due to the project owner of those properties having blanket policies that are in effect through the Home Owners Association (HOA).
Each month, a portion of your mortgage payment is deposited into the escrow account, and when these bills come due, the funds are withdrawn from the account to pay them.
How Does a Mortgage Escrow Account Work? It is about your money to pay expenses each month…
A mortgage escrow account works by setting aside a portion of your monthly mortgage payment to cover property taxes, homeowners insurance, and the stated items above that are related expenses.
The funds are held in a separate account by your mortgage lender and are used to pay these bills when they come due. This helps ensure that these expenses are paid on time and that your home remains protected.
The protection is to make sure there are no unpaid taxes and to ensure that you have adequate insurance to cover any losses on your home should there be a disastrous event such as fire, flood, storm, etc.
Your mortgage lender will typically review and adjust your escrow account annually to ensure that the correct amount is being collected to cover these expenses.
What Expenses Are Typically Included in a Mortgage Escrow Account?
A mortgage escrow account typically includes expenses such as property taxes, homeowners-(hazard) insurance, and mortgage insurance (if applicable). These expenses are paid on your behalf by your mortgage lender when they come due.
It’s important to note that not all expenses are included in a mortgage escrow account, such as HOA fees or special assessments. Be sure to review your mortgage agreement and speak with your lender to fully understand what expenses are included in your escrow account. This is based on the type of property you purchase.
Typically, a single-family dwelling will have taxes and insurance and depending upon the loan to value, possibly mortgage insurance (MI). *Some lenders may have different rules.
A condo normally has homeowners insurance for the contents (furnishings) which must be paid by the borrower.
Why Do Lenders Require Mortgage Escrow Accounts?
Lenders require mortgage escrow accounts to ensure that the necessary expenses related to the property are paid timely. This protects the lender’s investment in the property and helps to prevent any liens or legal issues that could arise from unpaid expenses. It also prevents the lender and homeowner from total losses from unknown hazardous events.
Additionally, having a mortgage escrow account can help homeowners budget for these expenses by spreading them out over the course of the year, rather than having to pay a large lump sum all at once.
How Can You Manage Your Mortgage Expense Account Effectively?
To effectively manage your mortgage escrow account, it’s important to understand how it works and what expenses are included. Make sure to review your annual escrow statement to ensure that all expenses are accurate and accounted for.
If you notice any discrepancies, contact your lender immediately. Additionally, it’s important to budget for any potential increases in expenses, such as property taxes or insurance premiums. By staying on top of your mortgage escrow account, you can ensure that your expenses are paid on time and avoid any potential legal issues.
EndNote:
Sometimes lenders will waive escrow accounts if there is substantial evidence that the applicant/borrower(s) have sufficient residual income and also when the loan to value is less than 80%.
All you have to do is make sure you have monthly (PITI) principal, interest, taxes, and insurance payments in your account. The lender takes care of it all. They will let you know if something changes.
My advice as a prior mortgage professional is that the escrow account makes the mortgage monthly payment process easier for everyone.