Your Mortgage Blog

Posted on
April 8, 2022
by
Neena Vlamis

Escrow Accounts Explained

What are escrow accounts in relation to a homeowners mortgage? It is a savings account that the lender sets up to collect payments such as the mortgage, property taxes, and homeowners insurance. For example, the mortgage servicer may help a borrower open this account so that they can deposit payments into it in equal amounts over twelve months.

The purpose of an escrow account on a mortgage is convenience. The mortgage servicer uses it to pay bills on your behalf as they arise.

Below, mortgage professional Neena Vlamis discusses why a mortgage escrow account could be beneficial, including how to cut transaction-related costs.

How Does An Escrow Account Work?

An escrow account leaves the choice of how to pay the property’s bills in the hands of the investors who finance the loan. Any investor wants the bills settled at a time to avoid losing money on unnecessary interest or default-related penalties. In most cases, they require an escrow account to cover tax or insurance coverage payments.

The mortgage servicer receives your monthly mortgage payment and manages the budget and payments on your behalf. It is also a helpful arrangement to spread costs over the year instead of having to come up with a huge sum at the drop of a hat.

The Role of Escrow When Buying A Home

Once a potential buyer makes an offer on the house they want, they write a personal check. The amount is usually 1-2% of the purchase price or higher. The servicer does not deposit the check until the seller accepts the offer, but the deposit shows that the buyer’s offer is a serious one.

If the seller rejects the offer, the manager returns the money; they will deposit the money into an escrow account if the seller accepts your initial offer. That escrow account covers the down payment and other commitments, like the deal’s closing costs.

Does Every Borrower Need An Escrow Account?

No, not every mortgage application will need an escrow mechanism. The decision depends on:

• the type of mortgage

• the lender’s requirements

• the amount of equity available

For example, escrow accounts apply to government-backed loans, such as FHA and USDA loans. Other lenders may decide that an escrow account is unnecessary for their terms. However, experts advise using an escrow account wherever possible because it genuinely eases the burden of budgeting and paying property taxes and insurance throughout the year.

Professional Tips to Cut Escrow Costs

Escrow costs may seem negligible, but every bit adds up in the long run. Rather, streamline the escrow mortgage account as follows:

Research: Be thorough and find the best deals

Gather referrals: People you trust will give you honest feedback

Go local: A locally based escrow company might be cheaper

Compare: Weigh the principal and interest amounts across companies and select the best value

Ask an expert: Work with an agent who shares a vast knowledge of real estate transactions. It should be a trusted service that can tell you the whole story, from opening a mortgage escrow account to handling the administrative processes.

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