There is more to purchasing a home than the cost of the home itself. There is the interest rate, which you and your lender have likely already factored into your monthly payment. There are also the fees of the real estate agent, if any. These types of costs are frequently discussed throughout the lending process.
But there are other fees as well, including property taxes – which are required by the local government – and insurance, which is required by your lender. These expenses are not crippling, but they are important enough that many lenders encourage you to set aside this money into a separate bank account known as an “escrow account.”
Introduction to escrow accounts
While mortgage payments are due every month, property taxes and homeowners insurance are not. They are lump payments, due usually once per year, to cover the costs for the following year. These payments are vital for both you and the lender – if you don’t pay property taxes, your home can be seized, and if you don’t pay homeowners insurance and there is a serious problem, your home can be lost forever. This can be a problem for both you and your lender.
To make sure that each of these payments is made on time and in the correct amount, your lender may require an escrow account. Every month, you pay a small amount more than your monthly mortgage payment. That extra amount is then put aside in a special account – the escrow account – so that you are guaranteed to make the payment on time and in full.
What are the benefits of escrow?
It is true that the primary function of an escrow account is protection for the lender, because while you are paying a mortgage, the lender is the one that owns the home. There are also benefits of escrow accounts for borrowers as well. These include:
- Guaranteed Savings – For many, it is very difficult to save large sums of money each and every year. escrow accounts ensure that you always have the money ready for your insurance and property tax payments, and that the money is available and ready on time.
- Peace of Mind – Escrow accounts are managed by lenders, not by borrowers. You don’t have to worry about making sure that you have moved the money over or that you make your payments on time. Your lender will do all the work for you.
- Better Loans – Although you may not notice it as a borrower, escrow accounts are one of the tools that help keep interest rates lower. If escrow accounts did not exist, your lender would need to calculate the added risk of a missed payment into their expected interest rates.
Many states and lenders require escrow accounts, but even if they were not required they are usually the best option for the borrower. They are safer, easier to manage, and reduce risk for the lender – which means less of a payment for you.
For more information about escrow accounts, or to find out why Open Mortgage is the top choice for mortgage lending, contact me today!