Escrow accounts can allow you to pay insurance and taxes when the mortgage is due.
Many first-time buyers are caught up in the process of packing, organizing, and signing a plethora of paperwork. These couples, individuals, and families often need additional help managing the costs of home ownership, such as taxes and insurance. After all, there’s no avoiding it!
These costs are separate from the mortgage and are due less frequently, therefore, the borrower’s mortgage lender often requires her to establish an escrow account, also known as an impound account. The borrower makes an escrow payment at specified times, and the lender or mortgage servicing company is responsible for paying payments in full when they are due.
Here’s how it works:
Principle + interest + mortgage insurance (if applicable) + escrow (insurance and tax) = total monthly payment.
Owning real estate includes making property tax payments to the local tax assessor. Homeowners must pay taxes at least once a year, and may risk foreclosure if these are not paid. The lender may also require a homeowners insurance policy which will protect the financial investment of the house from damage. Additionally, if you live in a condo or neighborhood with a homeowners association, you’ll likely have additional fees that are usually paid out separately.
Establishment Sometimes an escrow account is established at the same time as the mortgage. The lender typically requires an escrow account when the borrower is a first-time home buyer, has made a down payment of less than 20 percent, or has an otherwise risky mortgage loan. The lender may also require an escrow impound account if the borrower has failed to manage the tax and insurance payments on his own.
Clarification “Escrow” also refers to funds held in a third-party trust account during the mortgage refinances or real estate purchase transaction. The lender will collect the first escrow payment and reserves needed to establish an escrow impound account at closing!
Talk to your escrow officer directly with questions that arise and for information on your escrow.
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