Whether you decide to purchase a new home or refinance your existing one, your lender may require that you keep something called an “Escrow Account.” Many first-time homebuyers are unsure of what exactly escrow is and how it works.
Here’s a brief explanation of mortgage escrow:
What is escrow?
Escrow is an account managed by your mortgage lender, used to pay your annual taxes and insurance on your home. Each month, 1/12 of the estimated costs for the year are deducted from your mortgage payment and paid into the account.
Do I need to escrow?
Whether or not you need to maintain an escrow account depends on your lender and your loan type. Most lenders require borrowers to maintain an escrow account.
How does escrow work?
Escrow accounts are established and maintained by your lender. When the taxes and insurance come due, the lender then pays them on your behalf from the escrow account.
What are the benefits of an escrow account?
The main benefit of having an escrow account is that your lender takes care of paying your taxes and insurance for you. That means you don’t have to come up with a large sum of money once a year to pay your insurance and taxes.
What are the disadvantages of an escrow account?
- Most homeowners will have several thousand dollars tied up in their escrow account at any given time. As most escrow accounts do not earn interest, you lose the income you could have generated by investing it elsewhere.
- Escrow accounts may have fees.
- As property taxes are assessed, your monthly deposits into your escrow will need to be re-evaluated. If there is a shortage, it could mean your monthly mortgage payment will increase in order to catch up on the amount you owe and also satisfy the new tax amount going forward.
For more information on mortgages and home financing, visit www.freedommortgage.com.
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