Education Moment: Everything Escrows

Today I’d like to talk about escrow accounts. This is usually a hot topic this time of year.

If you have a mortgage, chances are you’ve heard this term but may not have a full understanding of what it entails and their role in your mortgage loan. An escrow account is a type of account a lender may or may not require for your loan. It is used to manage a borrower’s taxes and insurance payments to help mitigate risk to a lender. If you have an escrow account, a lender will simply take your last year’s tax bill and insurance bill and divide by 12 and add that to the required principal and interest payment as well as mortgage insurance if applicable.

You are probably aware that you’re required to have sufficient homeowner’s insurance coverage in order to qualify for a mortgage. Lenders want to be protected against a total loss of collateral such as a fire or other event that could hurt your property’s value. In addition, lenders want to make sure property taxes are paid yearly so there aren’t any additional liens put on the property that could create a loss for the lender if a borrower foreclosed

When the respective bills are due, the lender will cut a check either send directly to the party that needs to be paid or cut a check to you and whoever the required payee is so you can drop it off prior to the due date. This is nice option for those that still want to handle the payment and get a receipt immediately. Also, escrow accounts may add a little extra money into that account initially to cover increase for taxes and insurance down the road. If there isn’t enough money in the account due to a major increase or special assessment, it is still the borrower’s responsibility to pay the difference. There are many regulations in place to make sure there is correspondence in the event increases happen so the customer is well aware.

Below are basic escrow guidelines. Individual lenders may have additional policies or requirements. Always ask your loan officer about the details.

• Conventional loan- Will require an escrow account if your loan to value (LTV) is above 80%, based of the appraised value used to obtain the loan.
• Government loans (FHA, VA, USDA) – Required no matter what the LTV. In most cases, borrowers utilize these programs because of lack of down payment or equity in the first place.
• Jumbo loans- These will vary quite a bit. Call us for specific information

If you fall into the category that you may not be required an escrow account, you still have the option for one. These borrowers may not be sure what advantages and disadvantages of having one are.

It really comes down to personal preference. If you’re someone that saves well or receives a large bonus at the end of year and like having a lower monthly payment for cash flow reasons, an escrow account may not be for you. On the other side of the fence a borrower may opt for an escrow account because they are not good savers or simply like the peace of mind about not worrying about a large tax bill at the end of the year. Also, taxes may rise and that can make it a little harder to budget for. The downside is not being able to collect the interest on that tax money in a savings or other type of liquid account. Another downside may be that some lenders may charge a one time fee up to .25% for not opting for an escrow account. This could have an effect on the rate we can offer or closing costs. I recommend discussing these options with you accountant and financial planner if you still need help determining what’s best for your financial situation.

If you have a specific escrow question please feel free to comment below or contact us and we can see we can help! Thanks and make it a great day!