The world of house-hunting can be overwhelming with all of the taxes, fees, deposits, handshakes, etc. and you will quickly want to go back to simpler times when your parents did all of this while you just played in the backyard. But fortunately with escrow, you do not have to do all of this alone!
What is it?
- Escrow accounts are here to benefit you.
There are two types of escrow accounts!
- Sometimes the entire process of being under contract and, specifically, your earnest money deposit are referred to as being in escrow.
- Also, the account that accumulates your monthly insurance and property tax payments is called your escrow account: Since property taxes and insurance premiums are typically due once or twice a year, putting a portion of the amount due aside each month means you don’t have an unfortunate surprise come tax time.
How does it work exactly?
- When you get a home loan and are in the midst of closing on that loan, you will have what is known as a home in escrow. When you buy the home, the escrow agent will make sure the money is transferred to the right people at the right time.
- The escrow account offers the lender some protection, too, because a borrower is less likely to skip paying taxes when one is in place.
Explain more about how being in escrow protects everyone.
- When you buy a home, you will put what is known as earnest money down on the home, money that shows the seller that you are committed to purchasing the home. This also prevents you, the buyer, from making multiple offers on multiple homes, which takes them off of the market—a major pain for sellers if you choose not to purchase in the end, so everyone gets to have a better time during the process!
- That money will also eventually go towards the home’s down payment and closing costs.
- It also prevents sellers from losing money should you decide not to purchase the home last minute. If you back out of the deal without a legitimate reason, the money held in escrow will go to the seller for their troubles.
What if the seller doesn’t hold their side of the bargain after closing?
- Good news! That earnest money in escrow also helps protect buyers in odd events such as an inspection found something that needed repairs. Let’s say the basement leaks water. If the seller agrees to repair the issue but a final inspection shows that it wasn’t correctly repaired, the buyer’s money is safe until the basement is fully repaired.
What about the escrow account once I have my mortgage?
Yes! It also helps make it easier for buyers to manage multiple payments like their taxes, insurance and mortgage. The escrow agency where the money is held will make sure the right amount is paid on time.
How much exactly is contributed to an escrow account overall?
It makes sense that you’d hope that the amount you have to contribute to the account would remain constant from year to year, but we can’t give you an exact amount because it can be subject to some fluctuation, based on a number of factors.
Generally, three things can affect the amount you need to pay towards your escrow account:
- One of the more common reasons for a change in the amount you pay is a change in your property tax rate. Taxes might increase in the area you live, due to a change in laws or an increase in your home’s value. Taxes can also drop if your home and property decrease in value.
- The amount you need to contribute to the account can also change if your homeowner’s insurance premiums increase or if the insurance company charges you an additional fee.
- You can also see a change in the amount you need to contribute to the escrow account if there was a mistake in the initial calculation when you got the mortgage.
How can one be on top of these changes to avoid costly hiccups?
Even if you know that your property taxes have gone up (or down), you might not see the impact of the change right away.
- Typically, lenders perform a yearly escrow analysis, to see if they have been charging you the correct amount.
- If the lender hasn’t been collecting enough each month, you’ll have a shortage, which you’ll have to make up. The size of your escrow payment will then most likely increase.
- If your lender has been charging you too much, you’ll have an overage. The lender can refund the amount of the overage or it can apply it to your next escrow payment. Usually, if there’s an overage, the lender will adjust your monthly escrow payment down.
What if I don’t want to pay that much? Does one really need an escrow account?
- Whether you’re required to have an escrow account depends on the mortgage you have. Some mortgage programs, such as the Federal Housing Administration and Veterans Administration programs, require escrow accounts, since the borrower has put down less than 20 percent of the home’s value.
- Usually, you’ll need to have paid off at least 20 percent of the loan (or if you make a modest payment, usually ¼ of a point – that’s $250 for each $100,000 of loan amount) before your lender will let you waive escrow.
- With Atlanta Mortgage, we provide cost free escrow waivers with as little as 10% down!
What is waiving escrow?
Waiving escrow means that you’ll have to pay property taxes and insurance premiums on your own. The amounts can still fluctuate, but you’ll see the changes in one lump sum, rather than in a series of monthly payments.
But when it’s up to you, it’s up to you! Some people need the help to simplify budgeting and life in general in the chaos of buying a home and it’s worth the small price of paying the escrow account fee. Others want to control the payment of taxes and insurance themselves to avoid the risk that the servicing company will slip up.
Take a look at our closing cost calculator to get an idea of how much you’ll need to front load your escrow account.
There are so many benefits to opening an escrow account to ensure that you are taken care of in the, what can be, stressful journey of purchasing a home! And with how crazy this process can be, you deserve all the easy ways out!
If you’re still not sure about whether to go with having an escrow account, check out this Dave Ramsey article for more guidance