What is an Escrow Account and how does it work?
Let’s define Escrow Account in connection with a mortgage!
An escrow account is a specially designated savings account into which funds are deposited for a defined purpose.
When I meet first time home buyers who are buying a Lakeland FL home the one thing I love to do is to educate them about the home buying process. One of the questions I’m being asked and also not very well understood is why is there money being held in an escrow account when I purchase a Lakeland FL home and how does it work?
Why is there money being held in an escrow account?
Say you opt for an FHA mortgage with a downpayment of less than 20% or a VA guaranteed loan on your Lakeland Fl home. These types of home loans will require you to “escrow” your scheduled monthly home owners insurance (hazard insurance) as well as a set amount for your property taxes and private mortgage insurance (FHA). The lender basically wants to be sure that you will be able to cover these bills when they come due. When the time does come for them to be paid, your lender cuts a check to each entity from your escrow account. You will not have to pay these bills directly.
An escrow account for most first time home buyers is piece of mind. It helps manage your budget because you don’t have to make lump sum payments when your property taxes and property insurance is due. You already made the payments throughout the year. Your payments are made on time, keeping your home protected and it meets your lender’s requirement.
How does an escrow account work?
After your Lakeland FL home purchase, each year your lender will send you an itemized escrow disclosure statement on the status of your escrow account and history of escrow payment received and bills paid for taxes and insurance. Lenders will often identify whether they will collect more money to cover a shortage or return money to you should there be an excess in your escrow account due to decrease in property insurance and taxes. Most lenders set a two month cushion, therefore increasing or decreasing your escrow balance to an allowable low point set by Real Estate Settlement Procedures Act (RESPA), your mortgage loan documents, or by state law, if applicable.
Even though your lender makes those payments from your escrow account, I strongly encourage you to stay on top of your property insurance policy and property taxes. When time comes for your annual renewal shop around for competitive insurance pricing. Don’t ignore your property tax bill, you may have to adjust your budget. You don’t want to be surprised when your escrow payment goes up.