Learn the basics of escrow accounts and why they are used with your mortgage. Find the best information on why these loan accounts do not earn interest.
These accounts are actually special accounts that are established in conjunction with your mortgage in order to hold money that is designated for things like property taxes, hazard insurance premiums, mortgage insurance premiums and other priorities. You will not earn interest with these kinds of accounts.
Mortgage escrow accounts make certain that the above mentioned items are paid on time for you. They guarantee that there is always an adequate amount of cash left over to pay any bills as they become due; as a result, the homeowner is able to circumvent the dangers of delinquent taxes or lapsed insurance coverage.
The lender is very interested in the timely payments of taxes and insurances. That's why they encourage these types of accounts to be set up. Since they are willing to loan you money to buy a house, they don't want the house to become behind in their taxes or insurance. Thus a special account is established.
You see, if the taxes get too far behind, then the taxing authority can seize the property. The lender don't want that as they have a vested interest in the property since they have loaned you money.
The same is true for hazard insurance. If that insurance was to lapse and an accident occurred like a fire, the lender would be at a loss to recover their monies.
At times, unforeseen raises occur in either your taxes or your insurance. An account like this pays these increases automatically. Unfortunately, they will pass the increase on to you.
How do they do this? They raise your monthly payment amount to reflect any increases they have paid or anticipate paying in the next year. You see, your monthly payment is made up of the amortized loan amount and interest. Then they add the amount that will go into the escrow account to pay these upcoming expenses.
Now the mortgage company will give you two possible options to pay these increased amounts. One way is they offer you to pay the increase in one lump sum. The other way is to divide the increase over the next year. Thus your monthly mortgage payment will go up.
At the time of closing on your new home, monies are usually collected from you to pay the taxes and hazard insurance by the time they are next due. If their due date is at some time in the future, then these monies are put in an escrow account to pay when due.
Then the lender figures the amount that needs to be saved up to pay them by their next due date and divides them by the number of months left until they are due again.
For example, if your taxes are $600 a year and you have 12 months before they are due again, they would divide that $600 by 12 and add it to your monthly payment. In the above example, they would add $50 to your payment and place that amount each month in the escrow account to accumulate.
Once the taxes are due, the monies are there to pay for them. The mortgage company makes the payment from the escrow account. The same is done for the hazard insurance.
Consider what a benefit this is to you, the lender pays the premiums and the taxes as they become due, even when the money hasn't been all collected from you yet. Of course, mortgage companies then compensate via raising the amount one pays into the escrow fund every month.
Now, if a mortgage company finds itself with excessive money in your account, it will normally send the overage to you. An evaluation of this sort is usually done one time in a year.
Not always is it required to have escrow accounts associated with your mortgage. But if your LTV (loan to value) is greater than 80% the lender usually requires it.
If your LTV is below the 80% threshold, think carefully before you decide to not have escrow associated with your mortgage.
Well, it is true you can have a lower monthly payment by not setting up an escrow account. But when your taxes or insurance are due, can you come up with that large lump sum?
Let me share an experience with you to illustrate what I'm talking about. A friend of mine was negotiating with her lender concerning her monthly payment. She didn't want to pay more than $500 a month for the home. She had put a large enough down payment on the house so she was below the 80% threshold. The scrupulous loan officer encouraged her to forgo the escrow to lower her payment.
Unfortunately, she didn't talk to me about this. She wasn't a good saver, but she was diligent to pay her monthly mortgage payment. Then her tax payment came due! She had spent everything she earned monthly and hadn't saved any money toward her taxes. Long story made short, she lost her home. She couldn't seem to come up with the money to pay her taxes each year.
If you are a good saver, set up a savings account and put the monies in each month yourself. But if you're one who seems to have difficulty keeping any money in the savings, then having the lender figure an escrow account for you is the right thing to do.
These escrow accounts come with a lot of benefits for both the lender and the homeowner. The local governments obtains a more efficient way to collect their monies. And you don't have to worry about a surprise increase or large lump sum payment to come up with periodically during the year.
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