Homebuyer Tips
Escrow Lesson for First Time Home Buyers
If you’re contemplating buying your first home and have already been pre-qualified by your lender, you probably have a pretty good idea of your target monthly payment. A portion of your monthly payment typically includes escrows.
Some loan programs require an escrow account while others allow the borrower to ‘waive’ this additional account. If the loan program you select requires escrows, your lender will establish the escrow account when you close your mortgage loan. This account is used to set funds aside on a monthly basis for expenses that accompany home ownership. These expenses are costly and need to be paid in one large lump sum, such as property taxes and homeowner’s insurance. The escrow account comes into play to help homeowner’s budget for these large annual expenses.
The estimated annual amount for these expenses is broken into twelve payments and added to your total monthly mortgage payment. Dividing these expenses into monthly installments protects you from coming out of pocket thousands of dollars for these payments annually. When it’s time to pay property taxes and insurance premiums each year, your lender will pay them for you with the money you’ve accumulated in your escrow account.
Keep in mind, escrow payments tend to change, as property tax and home insurance rates fluctuate. Therefore, you will see changes in your mortgage payment as the escrow account re-sets annually.
Every year, your lender will complete what is called an escrow analysis to determine how much money you’ll need in your account for the following year. In some instances, your lender may determine you’ve overpaid in your escrow account and will issue a refund for the difference. Alternatively, they might also determine you underpaid and will divide that shortage by 12 months and add it to your mortgage payment.
It is important to stay informed about your mortgage and escrow account, so you’ll understand what to expect every year. As a precaution, you could add additional money to your escrow account for the year to ensure you don’t incur a shortage. You should speak to your lender for guidance to make an informed decision based on your financial situation.
As a reminder, most mortgages require escrow accounts; however, if you meet certain requirements you may be able to opt out. Ask your lender about your escrow options before you close on your loan.
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