What is an escrow account and how does it work? Look no further than today’s message for the answer to those questions.
Essentially, an escrow account acts as a sort of savings account to hold your taxes and insurances for your lender so that they can make payments at the end of the year on your behalf.
Once the money has been deposited, the lender will collect one-twelfth of your taxes and insurances month to month. This way, when your respective bill is due, they can make the payment for those items.
The due dates for each oftentimes don’t fall on the same day; traditionally, your insurance payment must be made on the anniversary of your purchase, whereas, here in Florida, taxes are typically due sometime in November.
In actuality, taxes in Florida are due in the month of March, but you’re allowed a discount of 1% for every month your taxes are paid early. The maximum allowance for months paid in advance is four. Your lender will be sure to make the payment in November so as to give you the maximum discount.
Money set aside in an escrow account gives the lender peace of mind that taxes can be paid in a punctual manner and that no lien is tacked onto the property. As far as insurance goes, they’ll have peace of mind that the property is safeguarded against the potential for uninsured damages that they’ll have issues collecting money on.
What benefit, then, does an escrow account carry for you, the borrower?
Consider this as a method of budgeting your tax and insurance payments, so that you’re not left to foot a giant tax and/or insurance bill at the end of the year. These accounts are required if you’re purchasing through an FHA or VA loan, no matter what your down payment will be.
If you’re buying via a conventional loan with less than 20% down, you’ll also be required to open an escrow account. You’ll only be afforded the option to waive your escrow when your down payment is greater than 20% on a conventional loan. In that case, any tax or insurance bills will come straight to you for payment, rather than your lender.
If you have any additional questions concerning escrow accounts and how they work or if you have any real estate- or mortgage-related questions, please contact us. We’d be happy to help!