Taking ownership of a home entails many other expenses that just paying back your mortgage loan. In addition to having to pay for routine maintenance of your home, you will also need to pay for homeowner’s insurance and property taxes. In order to make the process of making these payments easier, however, your mortgage lender will likely provide you with the option to open up an escrow account. You should understand more about an escrow account and how it works before agreeing to escrow terms.
Basically, an escrow account is an account that is handled by a one party in order to pay a third party. Therefore, when you have an escrow account through your mortgage lender, you pay an additional amount of money each month when you make your mortgage payment. These extra funds are used to pay for your homeowner’s insurance as well as your property taxes, with your lender making the payments for you on your behalf.
Your lender will re-examine your escrow account every year or perhaps every six months, since the amount of your homeowner’s insurance and taxes are estimated. In case your escrow account falls short of having sufficient cash to cover your expenses, you may be given the option to pay the shortage upfront or your monthly payment may be increased in order to cover the expenses. If you have excess funds in your account, on the other hand, you may receive a check for the extra.
Having an escrow account can be quite advantageous to a homeowner though they can end up paying a bit more than required upfront,. Namely, you don’t have to worry about making certain your insurance and taxes are paid by a certain deadline. Apart from giving you one less bill to worry about, you also don’t have to worry about getting hit by a large bill once every six months or so. The expenses are far more manageable since they are spread out over several months and are included in your mortgage payment.
Initially it may seem as if providing an escrow account service would be a major inconvenience for a lender, making you wonder why lenders would bother with setting up these accounts. Having an escrow account set up along with the loan is advantageous to the lender as well is a fact.
Lenders have a vested interest in the property that you have purchased is something you should not forget. After all, if you default on the loan, the lender will need to try to resell the property in order to recoup the money it has lost. Similarly, if your home is damaged or if it is taken over by the county, city or state because you failed to pay your taxes, the lender will experience a loss. Essentially the lender is protecting its investment by including your tax and homeowner’s insurance payments in the mortgage loan payment and by paying these expenses. Because of these reasons, you will most probably not have an option regarding setting up an escrow account, as your lender will require it in order to make certain these expenses are getting paid.
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