Most homeowners have a long-term escrow account, established at closing by the lender. Your lender uses the account to collect and hold the portion of your monthly mortgage payment that goes toward mortgage insurance, property taxes and homeowners insurance Then, the lender pays them for you from the escrow account when they are due.
Is an Escrow Account Required?
Almost always, because it protects the lender’s investment.
If you were to fall behind on your property taxes, you could end up with a lien on your home — and eventually lose it. As you can imagine, lenders don't like it when someone else has a claim on your (their) property. And if your homeowners insurance lapsed and your home was seriously damaged, again, the lender’s investment would be in jeopardy.
But an escrow account offers two big pluses for you too:
You’re automatically putting money away for these expenses each month instead of having to budget for a few big payments
Someone else is managing those tax and insurance bills for you
Is there any advantage to not having an escrow account?
Sometimes you are allowed to waive the escrow account, for example if you have 20 percent in equity. But because this increases the lender’s risk, there might be a fee for doing so, in the form of a higher interest rate for the life of the loan. Ouch.
If your income varies — maybe you’re self-employed or work on commission — you might find it easier to put tax and insurance money aside in big chunks during good months, instead of every single month. Other than that, some homeowners just prefer to have total control over their money.
Whatever the case, if you want to go without an escrow account, you have to be really good at saving and really good at keeping track of your bills.
How much goes into my escrow account at closing?
As part of the closing costs, lenders often ask buyers to put in two months of estimated property taxes, mortgage insurance payments, and homeowners insurance payments. They like a cushion.
Sometimes you have to pay the entire first year of homeowners insurance up front and immediately start making escrow payments for next year’s bill.
Can I earn interest on my escrow account?
Utah is one of the 15 states that do require lenders to pay interest on escrow accounts. The other states are: Alaska, California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin. Even in these states, there can be exceptions for legal reasons. So ask your lender about it when taking out your loan.
Can my escrow payments increase?
Yes. The most common reason for a bump in your escrow account payments is a property tax increase. The tax rate can go up, and so can the assessed value of your property. Your homeowners insurance premium can go up too, but probably with much less impact.
Your escrow payments can go down too. Your tax rate or the assessed value of your home could drop. And if you’re paying mortgage insurance, you’re probably going to get rid of it someday.
Escrow payments are usually analyzed once a year. Since the amount going into escrow is an estimate, sometimes there’s an adjustment, and you get a little back or owe a little extra.
What if there’s a mistake in my escrow account?
It might not sound fair, but even when your servicer is handling your property tax and insurance payments, you’re the one responsible for full, on-time payment. On rare occasions, a mistake can leave an escrow account way short on what a homeowner owes.
Here are a few things to keep an eye on:
At closing, watch for math errors and confirm that the right tax rate is being used to calculate your property taxes
Make sure you understand how property taxes work in your area; your local government’s website should have rates and contact info for the assessor’s office
Pay attention to your tax and insurance bills and due dates, even though you’re not paying the bills directly
Your mortgage statement shows both the balance of your escrow account and how much of your current mortgage payment is going into it; check it to make sure you’re on track to cover your bills and that any payments due went out
If you need a referral for a lender, please contact me. Understanding the loan process is an important part of the home purchasing process. I am here to help!
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