Homebuyers across the country, to right here in the south, are often surprised when adding together all the costs of home ownership. A mortgage payment is one thing, but what about the loan interest? The homeowner and mortgage insurance? And definitely don’t forget the property tax! Not only can all of this add up very quickly, but budgeting and managing these payments separately is a daunting task. So much so, that often it is required by the mortgage lender to establish an escrow account for all of the above.
What is an escrow account exactly? Well Texan Insurance is here to explain this seemingly technical service, to seem a whole lot less technical.
What costs go into escrow?
A typical mortgage includes four common costs associated – Principal, Interest, Taxes and Insurance (PITI):
P – Principal is the money used to pay down the balance of the loan
I – Interest is the charge you pay to the lender for the privilege of borrowing the money
T – Taxes refer to the property taxes you pay as a homeowner
I – Insurance refers to both your property insurance and your private mortgage insurance.
So how does one keep all of these payments straight? Escrow! An escrow payment essentially rolls up a percentage of all these costs into one prorated monthly payment the borrower makes to the lender or mortgage servicing company. The lender is then responsible for disbursing payments on-time and in-full for taxes and insurance when they are due. This assists the borrower in budgeting heavy annual or bi-annual costs, and makes it easier to pay one bill versus multiple. It also ensures to the lender the payments will be made. A win, win.
What amount is the payment?
The amount of the escrow payment is calculated by estimating the *insurance and property tax costs for the year and dividing the sum by 12, then adding this amount to the monthly mortgage payment.
Making on-time payments every month will send that additional portion to escrow covering the taxes and insurance for the year. If all payments are made on time for the year, at the end of the year, the money in escrow is withdrawn by the lender to cover said expenses.
This process repeats year after year, however adjustments are made to the monthly payment accounting for
*(It may be possible to have mortgage insurance coverage canceled and removed once you can establish that your loan-to-value ratio is less than 80 percent. However, you’ll still have to carry enough homeowners insurance to cover the replacement costs of the dwelling)
When does one establish escrow?
In some instances, the lender may let you decide whether to have an escrow account, but is commonly required by the lender before proceeding. Here are some scenarios when escrow is often established:
- At the same time as the mortgage is negotiated.
- For the first-time home buyer.
- When less than 20 percent is used for down payment.
- Risky mortgage loan.
- Lender requires due to previously failed tax and insurance payments.
At Texan Insurance we are here to serve you. Whether it’s your escrow insurance questions or general inquiry, contact us today.