As you are exploring all the possibilities of buying a home and securing a mortgage, one of the concepts borrowers may not be entirely familiar with is an escrow account. It’s a term people may have heard, but they don’t fully understand. Escrow accounts are an important tool for borrowers to successfully manage their money related to their housing.
Escrow accounts are set up by your mortgage lender to pay certain expenses associated with your home. It’s a kind of savings account in a way. Your lender will take a portion of your monthly mortgage payment and put it into the escrow account to cover insurance and property taxes. By putting this money away, it saves the borrowers the hassle of doing it themselves and having to pay such expenses all at once or twice a year.
Property taxes are just one of the expenses that can be paid through an escrow account. Several types of insurance premiums can also be paid, including homeowners’ insurance and flood insurance. If a borrower has put down less than 20 percent for a down payment, they may be required to take out a private mortgage insurance policy to protect the lender in the event the borrower defaults on the mortgage. That expense can be included in an escrow account as well.
Many lenders require their clients to pay insurance and taxes through an escrow account, and some may be required by law. If borrowers apply for a mortgage through the Federal Housing Authority (FHA) or the U.S. Dept. of Agriculture (USDA), an escrow account is required. But the good part about these accounts for borrowers is that the lender will manage and pay these expenses on their clients’ behalf. If for some reason a mortgage doesn’t include an escrow account, borrowers will be responsible for planning and paying these expenses themselves. If borrowers have a conventional loan, whether an escrow account is required may be up to the lender.
Escrow accounts aren’t quite a catch-all for all home expenses. Some of the payments not included in escrow accounts are homeowners’ association dues, water/sewer bills, supplemental tax bills, or any kind of one-time assessments from local government.
If an escrow account isn’t required as part of your mortgage, it might be a good idea to establish one anyway. It alleviates the burden on the borrower of having to calculate how much to put away each month to cover taxes and insurance. And if there are changes in taxes or premiums, the monthly payment is calculated for borrowers by their lender.
The concept of mortgage points that we’ll discuss here refers to credits a borrower can pay in exchange for a lower interest rate.
Mortgage closing costs can comprise any number of expenses above a home’s purchase price. See what’s included.
USDA mortgages are especially attractive because no down payment is required and there is no minimum credit score to be eligible.