If you’ve got a mortgage, you’re probably well aware of what an escrow account is. If you’ve never had a mortgage, you’ll soon find out about this option to help you in paying some of the more important mortgage-attached items in a timely manner, without the worry of coming up short when the bill comes due.
What Escrow is
Mortgage escrow accounts are special accounts set up by your mortgage lender in which money is held separately to pay property taxes, hazard insurance (also known as homeowner’s insurance), PMI (Private Mortgage Insurance) and any other escrow items that come into play.
What Escrow Does
Escrow accounts ensure that the above items are paid in a timely manner. When you agree to such an account (typically in writing at the time of your mortgage’s closing), a certain amount of money is put into your escrow account straight away at this time (typically three months taxes and homeowners insurance). Each month, along with your mortgage principle and interest payment, your mortgager adds the equivalent of one-twelfth of your annual taxes and insurance (for twelve equal payments) to pay the respective bills when they come due. You no longer have to worry about coming up with several separate, large payments due at different times of the year, as your escrow will take care of them all, including postage.
The Plus of Escrow Accounts
Any unexpected increases in homeowners insurance, property taxes, or any other escrow payment will be paid in full by your escrow company, even if all of the money is not in your account.
Many mortgage companies offer lower interest rates and down payment amounts to borrowers who opt to have their taxes and insurance escrowed, this is because escrow accounts protect the interest of mortgage loan investors with the added security (and lack of worry) of fire, theft, and tax liens placed on the property.
The Down-Side of Escrow Accounts
If your escrow company fails to pay your taxes and insurance, you are ultimately responsible for any and all late fees and penalties.
Even if you never refinance your home, your current mortgager may sell your home loan to another lender. Your escrow account will also change hands- this could be good or bad, depending on your previous experience.
If your escrow company doesn’t take enough money each month, you’ll have to pay it back, usually spread out over the next year. They will also have to increase your escrow payment out make up the difference on that amount for the next year. Even if you call and beg them to take more money each month, they legally don’t need to review your account’s progress more than once a year- so ultimately, you are responsible.
The Prognosis
If you like to pay one bill every month and not worry about such details as paying your property taxes, then go for the escrow account. They are a great option, especially for those who have difficulties budgeting their money.
On the other hand, instead of paying this money each month to your lender, you can put it into an interest-bearing savings account set up specifically by you to pay these necessary bills.
