What's included in your monthly mortgage payment?
In addition to principal and interest, part of your monthly payment goes toward your mortgage escrow account. Many people might not understand the term “escrow” as it refers to their monthly mortgage payments.
An escrow account is a special account used to pay property taxes and insurance on your home. With each monthly payment, besides paying principal and interest on your loan, you will pay an escrow amount. The amount of funds placed into escrow are held until your taxes and insurance are due. Then your mortgage company will pay the property taxes and insurance on your behalf.
Many homeowners prefer to have their mortgage company handle their taxes and insurance to ensure that sufficient funds are available at the time the bills become due.
Depending on the mortgage loan program you select, you may be required to have an escrow account. An escrow is required if you don’t put at least 20 percent down on home purchase. This is a way for the mortgage company to know that the property taxes and insurance are being paid, as required. It's also a great budget plan for borrowers!
Annual Escrow Payment-to-Distribution Comparison
Annually, your mortgage company will compare the amount put into your escrow account against and the amount paid out for taxes and insurance. Federal law limits the amount of money a mortgage company can hold in your escrow account. If too much was collected, you will get a refund from the mortgage company for the excess.
In contrast, if you are not putting enough money into the escrow account (e.g., your taxes and/or insurance rises considerably over the year), you might owe money to the escrow account. When that happens, most mortgage companies will give you the option of either providing a check for the balance due or permit you to divide the shortage up over the next 12 months and include that additional amount in your monthly payment moving forward. Ultimately, your monthly escrow amount increases, which in turn increases your monthly mortgage payment.
What if you don’t want to escrow your property taxes and insurance?
If you put at least 20 percent down on your home purchase, it's your decision whether you want to maintain an escrow account for the purpose of paying taxes and insurance. Some people like putting the money aside in escrow, while others prefer to exercise more control over their money.
There is no law that requires mortgage companies to pay interest on your escrow account balance. Therefore, it might be more advantageous to save the money yourself and earn some interest at the same time. Keep in mind that if you choose to pay the taxes and insurance on your own, you’ll need to be diligent about paying them in full on time.
Can you cancel your escrow account?
While each mortgage company may have different requirements, most of them allow you to cancel your escrow account once you meet a few guidelines:
- Your mortgage must be at least one year old.
- You must have made your payments on time.
- Your loan-to-home value must be under 80 percent.
These are just some of the basics about escrow accounts. If you've got specific questions about your escrow account, visit with one of our mortgage lenders. They would be glad to help.
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