If you are currently shopping for a home to buy, your lender might tell you that you will need to set up an escrow account when you close on the loan. If you have never owned a home, you may wonder what this is or why this is needed. Here are three important things you should know if you have never had an escrow account before.
What it is
An escrow account is a bank account that is used for several common expenses related to owning a home. The two main expenses it is used for are home insurance and property taxes. These are two big expenses you may have to pay once or twice each year, and coming up with the large amounts needed to pay them can be difficult for many people.
Because of this, banks often require that borrowers set up escrow accounts. With your escrow account, you will pay in a little bit of money each month. This money will grow over the year and will eventually be used to pay for your insurance and taxes. The lender will handle making these payments for you, and you will not have to worry about budgeting for the expenses or writing checks to pay them.
How it is figured
To determine how much money you will have to pay per month, the lender will add up estimates for the property taxes and insurance you will have to pay. The lender will also take into consideration the due dates for these bills. With this information, the lender will determine a monthly amount you must pay, and this amount will be due each month when you pay your mortgage payment.
When and why it is recalculated
Your lender will most likely evaluate your escrow account at least once per year. The purpose of this is to determine if your monthly payment is high enough to cover the expected expenses. This reevaluation is also completed as a way to change the monthly amount you must pay. If you have paid in too much over the year and have extra money in the account, the lender might issue you a refund for the overpayment. In addition, the lender may adjust your payment to a lower amount to compensate for this.
If you did not pay in enough, you may owe a little extra when this reevaluation is completed. In this case, the lender might also increase your monthly escrow payment that you are required to pay.
Escrow accounts are nice to have, and they are often mandatory by lenders. If you have questions about this or about real estate for sale, contact a real estate agent today.