Escrows
Author: Terri Ewing
Published: August 10, 2008
Escrows Defined
In regards to a real estate transaction, an escrow is when money is placed with a third party in an account until both parties execute the agreement. For a mortgage, escrows are money placed in an account so the taxes and insurance can be paid when they come due.
When you buy your house, part of the money you bring to closing for the mortgage is for escrows. The lender requires the title company to collect the money upfront to pay the taxes and insurance. If your mortgage payment includes taxes and insurance, (which most do) then that extra gets put into an account at the lender to pay next year’s taxes and insurance.
For example, your taxes are $900 a year and your insurance is $600 a year. $900 divided by 12 months is $75 for taxes and $600 divided by 12 months is $50. Your total mortgage payment includes $125 extra every month.
The lender collects an escrow buffer of 2 months at closing in case they have a shortfall. So in the example above, the cash to close when you bought would include an extra $150 for taxes and an extra $100 for insurance. Speaking of a shortfall, keep a very close eye on your taxes and insurance. If they go up and the amount escrowed every month does not cover it, your lender will increase your payment.
Now there is nothing you can do about that…if your taxes go up, they go up, but the lender might be pretty slow at discovering this. Your escrow account might be going in the hole for a while until the lender sees it. When they do discover it, your payment will dramatically increase to make up for the difference. If you know your taxes or insurance went up then start planning for the increase even if your lender hasn’t increased your payment yet.
Author: Terri Ewing
Related Articles
Reader Comments
How To Use Our Comment Section:
1. To comment on the article or post: Simply cursor down to the bottom and add your comment in the box, hit "Save". After moderation, your comment will appear next chronologically.
2. To comment on a comment (not on the post) or what is called a "nested" or "threaded" comment: Remember the name of the commentor, hit the "Reply" link in the comment you'd like to reply to. You're taken to the bottom where you can pick the comment name from the "Reply to" drop down list. Then add your comment to the box, hit save. After moderation, your comment will appear "nested" under the selected comment before chronology is considered. Nesting will go down 4 levels.
