If you’re borrowing money to buy a home, you may hear that you need a mortgage escrow. While it increases your mortgage payment, it’s not an extra charge – instead, it makes your life easier when it comes to fulfilling the financial obligation of paying your real estate taxes and homeowner’s insurance.
Understanding Mortgage Escrow
Mortgage escrow is a legal arrangement between you and your lender to hold funds for expenses, such as your real estate taxes and homeowner’s insurance. When you buy a home (or refinance), we can set up an escrow account and set aside 1/12 of your annual real estate tax and homeowner’s insurance costs.
How Mortgage Escrow Works
When you set up a mortgage escrow, you pay an amount larger than your principal and interest payments. The money you pay is set aside in a separate account to pay your real estate taxes and home insurance.
At EPM, each loan is automatically set up with an escrow account – that’s what this refers to – this WOULD NOT apply if the borrower waived the escrow account and chose to pay taxes and insurance on their own.
Who Needs Mortgage Escrow?
Anyone can add a mortgage escrow to their account if they don’t want to be responsible for saving for their annual taxes and homeowner’s insurance premiums.
Some borrowers will be required to have one too. Usually, borrowers with a down payment lower than 20% or with less than 80% equity in their home will require a mortgage escrow.
What is Included in your Escrow Account?
Your escrow account can include money to cover your real estate taxes, homeowner’s insurance, and mortgage insurance. If you live in an area that requires flood insurance, that can be included in your escrow account too.
Pros and Cons
Many people assume escrow accounts are ‘bad.’ They aren’t as bad as you think, though, and in many cases, they can be helpful, especially if you aren’t good at saving money.
Pros of an Escrow Account
- You may get a lower interest rate on your mortgage
- You don’t have to worry about saving money for your taxes and insurance every month
- Your real estate taxes and homeowner’s insurance will always be paid on time
- You don’t have to worry about tax liens or force-placed homeowner’s insurance
Cons of an Escrow Account
- You make your payments ‘early’ to cover the costs
- You may have to keep a reserve of at least 2 months of both taxes and insurance
A mortgage escrow account is a great way to stay accountable and on top of your mortgage obligations. Paying your mortgage means more than paying the principal and interest you owe the bank or credit union. You are also obligated to pay your real estate taxes and homeowner’s insurance.
An escrow account makes it easier to stay on top of your financial responsibilities, ensuring you are on time with your payments and don’t fall behind.