If you are a first time home buyer, the terms used when applying for a mortgage can be confusing. As a bank who wants to help our clients stay informed and make smart financial decisions, we thought we would spend some time on today’s blog to explain Escrow Accounts and how they work.
What is an Escrow Account? Essentially, an escrow account it is a holding tank. There are 2 types. One during the closing process of a mortgage and one after the deal is complete (that often stays in place for the life of the loan).
During the Closing Process
During any real estate transaction someone (either a lawyer or the title company) keeps all of the important documents and money in one place – a holding tank of sorts. That person will maintain the escrow account to:
- Hold any deposits paid while the transaction is taking place. (They will also hold on to any important documents as well).
- Once the deal is complete, they will make sure that everyone gets paid what is owed them. (Usually taking a small percentage or fee for themselves – typically 1 – 2 %.)
- They are also responsible for recording the deed and transferring the title into the purchaser’s name.
After the closing
Once you close on your home, an escrow account is created by your lender as a holding tank to pay fees associated with your mortgage. Generally that means your real estate taxes and homeowners insurance. Each month you will pay 1/12th of the estimated annual amount due. This money goes into your escrow account and is held until the bill due date. Your lender will pay the bills for you on the due date with the funds from the escrow account.
Your mortgage payment = principle + interest on the loan + estimated need for the escrow account.
At the end of the year, you will receive and escrow account review from your lender where you will see a breakdown of the total money collected verses what was actually paid. (Remember the amount paid into your escrow account each month is an estimate of what will be due.) If you end up paying too much, you will receive a refund. If you end up paying too little, you can expect the difference to be spread out over the coming year and the amount due toward your escrow account to increase.
Do I have to have an escrow account? Most likely.
If you have an FHA backed loan, then they will require an escrow account. Also, if your loan is considered high risk (perhaps you have made a down payment of less than 20%) then you will also likely be required by your lender to have an escrow account. Each lender sets their own policy regarding escrow accounts. Some require them, some don’t. Some utilize escrow taxes and insurance, others only taxes.
Here at WVFSL escrow accounts are not a mandatory part of our current policy, however we do reserve the right to require one. Additionally, we only escrow for taxes. Not for home owners insurance. So if you partner with us for a home mortgage, you will need to work out payment details with your homeowners’ insurance carrier.
Confused yet? We love first time home buyers and would be happy to have one of our loan specialists sit with you to answer all your questions. Give us a call!