Escrow is one of those terms that can be confusing for new homeowners. You may be asked to pay a certain amount of money to go into escrow, but may not know what it’s used for. Here’s a breakdown into what it is and how it works.
What is escrow?
Escrow means a deposit or fund held in trust or as a security by a neutral third party, which basically means the money is in safekeeping. In the case where you are purchasing a home, you will send in 1-2% of the purchase price of the home to either a closing, title or escrow company or an attorney and that money will be held in escrow until both parties agree to the sale and terms. You don’t want to pay the seller directly, the escrow is there to ensure that everyone gets what they are promised and all conditions are met such as home inspection or repairs. This protects the seller and buyer in the transaction until the home officially changes owners. After the closing process is complete, the money is transferred to the seller along with the rest of the purchase amount.
What does escrow pay?
Besides using escrow to hold a deposit for a new home, escrow is also used to pay taxes and insurance throughout the life of your home loan, so it’s all rolled in together into one monthly mortgage payment. It can also pay mortgage insurance (PMI) and flood insurance if you have it. Money is put into an escrow account to use for these other property costs and the bank or mortgage company pays them on your behalf. Every year the escrow account is reviewed to see if you have enough to cover these costs. Generally, you have one to two months of escrow payments accrued in your account.
How is my escrow amount calculated?
Your mortgage company or bank will look at your taxes and insurance costs over the next 12 months. They will contact your insurance company and local tax authority to get the amount or estimated increase or decrease. Then that is divided by 12 and added to your monthly mortgage payment. If you are short on escrow, the bank or mortgage company will add more to your monthly bill. If you are over, you will get money back if it’s over a certain amount and it will likely remain in your escrow account. Escrow amounts can fluctuate when taxes or insurance premiums increase or if your taxes were reassessed.
How can I see my escrow details?
You can see the details on your paper statement or online. The statement will show the amounts you have paid, your balance and any changes to your monthly payment.
Have questions about escrow? Contact Freedom Mortgage and we’ll help answer any questions you may have.