In all likelihood, you’ve heard the term “mortgage escrow.” But what is it, and, more importantly, how does it affect you? When you go to buy your first home, you will undoubtedly become highly acquainted with the concept of a mortgage escrow. But if you’re just thinking about buying a home or you’re in the process a home purchase, we wanted to give you a heads-up of what to expect. Keep reading to learn more.
Escrow Meaning #1
Like many words in the English language, “escrow” actually has dual meanings. But, thankfully, they both pertain to the mortgage and homebuying industry. Definition #1 refers to the time interval between when a seller accepts an offer on a home and when the home sale becomes final. During this period of a few days or weeks, the home is said to be “in escrow.” While you’re waiting for the purchase to be finalized, a third-party (not you, your real estate agent, or the seller or seller’s agent) is responsible for keeping what’s called earnest money. This is a fancy term for the deposit you paid to the seller to add credibility to your offer. Later on, it will go toward your down payment on the home, assuming you have one.
Also held in escrow during this time will be the deed to the property and net amount of money the mortgage lender will provide for the home loan. In other words, it’s the total loan sum minus any closing fees, such as origination or processing fees.
Escrow Meaning #2
The second and likely more familiar definition of mortgage escrow has less to do with the homebuying process and more to do with something that comes after. In this case, escrow refers to your monthly homeowners insurance and property taxes, which your mortgage lender will fold into your monthly mortgage payments at the time of purchase. Rather than paying these separately, a portion of your monthly mortgage payment will go to property taxes and homeowners insurance costs. By putting these in an escrow account, you don’t ever have to worry about digging into your wallet to pay your homeowners insurance or the county where you live.
An escrow account simplifies the process and ensures you’re all paid up on homeowners insurance and property taxes at the end of the year – instead of getting a surprise bill. Actually, you may receive a bill at the end of the year, but your mortgage servicer will pay it for you or send you a check to cover the balance. This is possible because of your escrow account, where you contributed money with each mortgage payment over a 12-month period.
While mortgage escrow accounts aren’t required with most loans, they’re a great idea. Especially if you want to simplify your life a bit by streamlining your bills. Who really wants the hassle of sending money to more places, if you can help it? Plus, an escrow account all but ensures you won’t come up short on your annual homeowners insurance fees and property taxes. Almost nothing would make for a less enjoyable holiday than that.
Still have questions about the concept of a mortgage escrow? We have answers. Please contact us at your leisure. We’ll walk through as many mortgage terms as you’d like to learn about. We’ll also help you get started on a home purchase or refinance if you believe the time is right. With mortgage interest rates still historically low, there’s never been a better time to become a first-time homeowner or change home addresses.