Escrow Accounts Can Work in Your Favor

house-money-piggy-bank picWhen you decide on your mortgage and lender, you may want to consider an escrow account.

This holds money to pay for your mortgage-related bills, such as property taxes and property insurance. And, while escrow accounts aren’t mandatory, they do help you stay on top of your important bills.

Escrow accounts are usually held by your lender and can be set up when you take out a mortgage. To fund the account, you make an initial deposit. At that point, the lender calculates an amount to be added to your monthly mortgage payment. This may include insurance premiums and property taxes.

For example, if you purchase a home with property insurance totaling $100 a month, prior to closing you must pay the insurer $1,200 for the first year’s coverage.

This $100 per month will then be added to your mortgage payment and held in the escrow account until it’s needed to pay next year’s insurance premium.

In the same way, the property tax amount will be added to your mortgage payments and held in escrow to pay your property tax bill.

These bills will be paid on your behalf from your escrow account, thanks to mortgage servicing (the handling of the daily functions of a mortgage.)

The responsibility for mortgage servicing can rest with your lender or a separate mortgage servicing company; both follow defined procedures and are regulated by the federal government.

The servicer will make adjustments to the escrow account annually, as property taxes and insurance premiums do change. If one expense is underestimated, you’ll need to top up your monthly mortgage payment, or write a check for it. Overages will be refunded.

You may waive the escrow account, but your lender can require a higher down payment and/or credit score, and charge a premium on the rate, to compensate for assuming the added risk, if you don’t pay your bills.

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