Let’s talk about your escrow account. The Merriam-Webster Dictionary defines escrow as a fund or deposit designed to serve as an escrow
I’m going to explain a little simpler what this all means. It’s not as complicated as you might think.
I’m sure you heard your lender talking about your escrows or your escrow account when you were going through the loan process. Your escrow account is kind of like a holding account for your homeowner’s insurance and property taxes. Every month when you make the payment on your home, you can look at your statement and it will have it broken down by how much of that payment is going to principal and interest (P&I) and then how much is going into “escrow” for your property taxes and insurance that are due once a year. When those payments become due the lender will take the money out of your escrow account and pay those items. You might be thinking but my first payment wasn’t due until 60 days after I closed, do I have to pay additional monies to catch my escrow account up, so I don’t start in the negative? The answer to that is no. When you closed on your home, your lender had figured the number of months for your escrow that needed to be collected at closing, this was part of your closing cost. Depending on the county you live in and the time of year you close, will determine the number of months that are collected to start your escrow account.
How can a change in your escrow account affect it and can it affect your mortgage payment?
If your property taxes or your insurance premium goes up this will cause a change in your escrow account. For example, if you haven’t filed your homestead exemption with the county and the existing exemption fell off due to the previous owners applying it to their new home this could cause a change in your taxes or if the County has assessed your home at a higher value, this will also cause a change. Another example of change is when your insurance premium goes up and when the payment comes due, the lender pays the new larger payment causing a shortage in your escrow account. At the beginning of each year your lender should do an escrow analysis on your account. This is to make sure that there is not a shortage of funds for the up coming year and the projected amount they have for your property tax and your insurance. It is also done to make sure there is not a large amount of funds left over after both items are paid. If there is a large sum of money left over, the lender will send you a check for the overage. If you receive a check it is always important to remember to reach out to your lender before you deposit these funds and spend the money on a new purse or set of golf clubs. When there is a change in your taxes and insurance, no matter if it’s a lower amount or a higher amount it will affect the amount that your mortgage payment is. The reason being is because the amount that is collected for your escrow account is part of the house payment. So, an example of this could be if you found cheaper home insurance after closing and changed insurance company then your payment would go down or if the County raised your property taxes then your payment would go up. Most of the time instead of raising your monthly payment to adjust for an escrow shortage over the next 12 months, the lender will let you send a lump sum to them for to deposit into the escrow account so that the shortage is taken care of and your payment doesn’t change.
I’m selling my house, does the lender keep the money that I have in escrow?
Once you have sold your home and the lender has received the funds and paid your debt in full, they will issue you a check for any funds that are left over in your escrow account. You will also want to contact your insurance company to let them know that you have sold your home, that way they are on notice as well and have your new mailing address that way if there is a refund from them for any term left on the contract it will be sent to you.
I just paid my home off so will I still have an escrow account?
Once you have paid your home off you will no longer have an escrow account. It will be your responsibility to make sure you pay your property taxes when they become due. You will also need to reach out to your insurance company so that you can discuss with them the best way to arrange payment that will fit your budget, sometimes this can be a monthly payment or a yearly payment.
What if I’m buying a home and I don’t want to have an escrow account?
The best way to avoid having an escrow account is to pay cash for a home. If you use a loan to purchase the property you can avoid an escrow account by putting at least 20% down in most cases, it just depends on what type of lender you use such as a mortgage company, local bank or credit union.
If you have additional questions regarding your escrow account please don’t hesitate to reach out to anyone of us here at Red River Title Company, we would love to answer them and any others you may have.