Escrows for taxes and insurance

When you buy a home, there is more to the monthly payment than your principal and interest payments on a mortgage.  Most people escrow for their property taxes and homeowners insurance (plus mortgage insurance if the loan requires it).   Some people prefer to pay their own taxes and insurance and that is possible on conventional mortgages, with at least 20% down.

Lenders prefer that homeowners escrow as they can verify that the taxes and insurance is paid.  If property taxes are not paid, there may be a lien on the house or a third party trying to collect that money.  If insurance is not paid and there is major damage, the homeowner is responsible for the damage.  If the damage is extensive, the homeowner may go into foreclosure and the lender doesn't want that.  Because lenders consider loans without escrows a higher risk, they frequently charge up to .25% of the mortgage amount in a escrow waiver fee to the homebuyer.

To calculate how much you need to escrow, you just need to add part of the tax and insurance bill to your monthly payment.  Add your taxes and homeowners insurance and divide that by twelve, that gives you the new escrow amount – plus mortgage insurance if you have to pay it.  When you close on your loan, your lender has the right to hold up to two months of escrow payments in reserve. 

Once a year, your lender will analyze your escrow account to make sure you have enough in the account to pay your taxes and insurance.  That part of your payment can change every year – taxes and insurance never seem to decrease, so expect that your escrow account may increase.  If you are short in your escrow account, you can pay a lump sum to bring the amount up or you can pay that over the next twelve months.  Your escrow analysis will show you what your options are.

Leslie Vanderwerf, Advisors Mortgage - Email – Website