Oct 6, 2020
All about Escrow Accounts
There are so many things to learn throughout the process of purchasing your first home. As you walk this journey, your Orizon agent will be right there with you to explain each unfamiliar term to you along the way. One thing you may not have heard of before is an escrow account.
What is an escrow account?
An escrow account is an account that a portion of your monthly mortgage payment goes into to collect the funds that will be used towards your property taxes and insurance premiums. Instead of saving for these things on your own, an escrow account makes it easy for you to contribute to your mortgage principal, interest, property taxes, and insurance premiums all at once.
How does an escrow account work?
Your mortgage lender will, essentially, hold the keys to your escrow account. They will be the ones who make monthly deposits into this particular account on your behalf once they've received your monthly payment. When your lender receives bills for property taxes and insurance, they use the funds in your escrow account to pay for these expenses.
To calculate how much you need to contribute to your escrow account each month, your lender will divide your annual real estate taxes and insurance premiums by 12. Tax rates do change on an annual basis, so your lender may expect you to keep a cushion in your escrow account, depending on your local laws, to account for these increases. If the actual increase is lower than what your lender estimated, you are reimbursed for the difference.
What are the pros and cons of setting up an escrow account?
When it comes to setting up an escrow account, your lender may or may not make the decision for you. Depending on your mortgage amount and local regulations, you may need to participate in this practice. In other cases, it may be a choice that you are presented with. Both FHA and VA mortgage loans do require escrow accounts to be opened. Either way, we want to be transparent about the pros and cons of escrow accounts so that you can be as informed and educated as possible.
Having an escrow account makes your life easier. The saving is done for you and it is guaranteed that your tax and insurance fees will be paid on time. It is no additional work for you and the rate remains consistent all year long.
On the other hand, while an automatic and predictable payment is attractive to some, others may feel as though putting their dollars into an escrow account is causing them to miss out on interest and short-term investment opportunities. Furthermore, some lenders may require borrowers to deposit several months of property tax payments just to open the account, which would mean an upfront payment.
Before making a decision, we recommend that you reflect on your unique circumstances in order to determine if an escrow account is the right fit for you. Your Orizon agent or mortgage lender can help answer any questions you have.