Tips On How An Escrow Account Works

When you make an informal bet with a friend, you usually have a neutral third person hold the money until the wager is settled. When taking out a mortgage to buy a home, you are basically doing same thing when you open an escrow account.

How an escrow account works:

When putting money in escrow, it is held by a neutral third party, referred to as an escrow agent, who is working for both the lender and the borrower. The role of an escrow agent is to carry out the instructions agreed upon by both parties. Once the terms of the agreement between both parties are met, the money is then released. Escrow accounts can be involved in anything from multimillion-dollar building projects to a simple purchase made on an online auction website.

When an escrow account is used:

A lender will usually require you to open an escrow account that’s used to cover property taxes and homeowner's insurance when your mortgage closes. You'll make an initial deposit, followed by monthly payments to the account. These payments are usually added to your regular mortgage payment. As your taxes and insurance premiums come due, the escrow agent will then release these funds.

The purpose of an escrow account:

The idea behind an escrow account is to protect the lender by ensuring that you pay your taxes and insurance premiums on time. For example, if you were to default on your property taxes, the local government can put a lien on your property, in turn making it difficult to sell. Another good example is if your house happens to burn down and you neglected to pay the insurance premiums, the lender is left with no collateral.

How you benefit from an escrow account:

Borrowers can benefit from an escrow account by helping them spread insurance premiums and tax expenses evenly over 12 monthly payments. For example, consider that your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If paid directly, that would mean three large payments a year. Now using your escrow account would be a manageable $200 a month.

Escrow payments:

Escrow accounts have a built-in cushion, if you miss a payment, the lender must still be able to pay your accounts on time. Federal law prohibits lenders from requiring more than two months expenses in escrow. The lender will review and adjust your escrow payments annually, because your tax and insurance costs will change slightly from year to year.

When an escrow account may be waived:

The money you place in an escrow account doesn’t earn you any interest, because most borrowers prefer to pay their taxes and insurance directly. Lenders may agree to this if your down payment exceeds 20 percent, however, some lenders will raise your interest rate slightly to compensate. In most cases, once you agree to deposit the funds into an escrow account, it is usually difficult to cancel, so it is very important that you make sure you fully understand the arrangement before your mortgage closes.

Make sure to contact your OwnerWiz Customer Service Representative if you have any additional questions regarding an escrow account.