Home Financing Lingo: The Basics of Escrow Accounts

Do you ever feel overwhelmed by home financing lingo used by your bank or real estate agent? When it’s a new process for you, the last thing you need is unfamiliar lingo confusing you or making you have to do extra work to understand what’s going on.

When you read below, you’ll be able to understand the basics of escrow accounts so that those home financing terms don’t throw you for a loop. Take a look at this guide for the basics so that you are prepared for your upcoming home financing needs.

What is escrow?

Starting from the beginning, you’ll want to learn what escrow is, how to manage it, and how it will affect your monthly payment. You’ll pay into an escrow account each month, which allows the lender to pay the required insurance or taxes on your property on your behalf.

You’ll pay part of the taxes and insurance premiums in your monthly mortgage payment, but when taxes and premiums are due to your lenders will pay them on your behalf from the account. The rest of your mortgage payment goes to pay your principal and interest.

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Why do I need escrow?

The escrow account is handy because it helps you when budgeting for a large expense, such as those annual property taxes. You don’t have to worry about coming up with the money because your lender handles it from your escrow account for you.

Escrow is perfect for having a special account for your fire and hazard insurance, your mortgage insurance premiums, property taxes, and more. The account means that you won’t have to worry about things getting paid on time and there will always be enough money to pay the bills when they are due.

You don’t have to risk tardiness or a lapse in coverage. With several upcoming large payment sums due at different times, it’s easier to have an escrow account to have your back for you on time paid in full.

How to manage the account

What happens if you are short money or there is a change in cost? Your escrow account is managed by your lender and they will typically cover shortfalls until they can just adjust your monthly payment. That will make up for a tax hike or premium increase, since your mortgage payment may fluctuate each year. The lender will project what is needed each year based on the amount of taxes you paid, insurance you paid, and other factors.

Do I really need escrow?

You can technically avoid escrow if you are working with a lender that will allow you to pay your own property taxes or home insurance premiums, but you typically have to qualify for this. If your loan-to-value ratio is under 80%, it will be more likely that they will allow you to forego an escrow account. The lender may then boost your interest rate since they would be taking on additional risk without escrow.

If it is required of you and put into place, it will be difficult to get the lender to cancel it.

This is a look at the basics behind escrow so that you don’t have to wonder what all of the lingo is about that your lender and agent use in the conversation!