Understanding Escrow Before Buying a Home

Everyone dreams of owning their own home and most people can’t wait to say goodbye to renting. It’s important for you to know that when you purchase a home and obtain a home loan, it’s likely that your lender will require you to have an escrow account. And, maybe you’ve already heard this term, but you’re not quite sure what it is and how it works.

What is an escrow account?
Escrow refers to a third-party service that’s usually required in a home purchase. When you borrow money from a financial institution or a direct mortgage lender, an escrow account will be set up at the same time as your mortgage. This allows lenders to create an account wherein part of your monthly mortgage payment will be deposited to help pay for future taxes and insurance premiums.

Why do I need to have an escrow account?
Most lenders require that you enter into an escrow agreement when you sign a mortgage contract. When calculating your monthly mortgage payment, your lender will determine the amount of your monthly mortgage payment as well as the additional funds needed to pay your property taxes and homeowner insurance. The lender does this to reduce the risk that these bills will be paid late, and liens could be placed on the property.

Calculating Your Escrow Payments
How much you pay upfront to cover property taxes will depend on when your first property tax installment is due. Your lender may require, for example, three months of property tax payments upfront to establish your escrow account. How much you pay into your escrow account each month will vary depending on your property taxes and homeowners insurance each year. 

Determining how much you’ll need each year into your escrow account, though, is not an exact science. That’s because your property taxes and insurance premium can change from year-to-year. It’s also why your lender will perform an annual escrow analysis to assess your escrow account to ensure that you are funding the right amount with each mortgage payment. 

If your property taxes or insurance premiums rise, your lender may increase the escrow portion of your monthly payment to make sure you have enough money to cover these bills. If your property taxes or insurance premiums fall, your lender may reduce the amount you need to contribute each month.

To learn more about escrow accounts, please visit our sponsors, Atlanta Postal Credit Union or Center Parc Credit Union– they’ll be happy to help with your specific questions.