It's possible that your mortgage lender wants you to put money into an escrow account in order to get a mortgage. This can leave you with a few questions so that you can better understand this concept regarding how you pay your mortgage. Read on to learn the answers to some of the questions you may have.
What Is an Escrow Account?
An escrow account essentially acts as a savings account where you put the money for your mortgage insurance, home insurance, and property taxes. Some mortgage lenders require you to put money into this account as a requirement for being approved for a mortgage, and all of those additional expenses will come out of your escrow account.
When Do You Put Money Into Your Escrow Account?
There will be money that you pay at the time you close on your mortgage so that your escrow account is funded. This will typically be enough to cover all of those initial expenses related to your home that need to be paid. However, the money you put toward your monthly payment for your home will be added to the escrow account incrementally. The majority of that payment will go towards the mortgage, but the remainder goes into escrow.
Why Does Your Monthly Mortgage Payment Change If You Have a Fixed Rate Mortgage?
A common issue people are confused about is why the payment changes on their fixed-rate mortgage. This is due to there being an increase in other costs that are paid out of the escrow account. For example, property taxes may have gone up and will require a larger monthly payment. The same thing can happen with your homeowner's insurance when it is up for renewal and the rates change. The mortgage lender will adjust the payment so that there is enough in the account to pay for all expenses.
Do You Ever Lose the Money in an Escrow Account?
The good thing about having an escrow account is that the money that you put into it is never lost. It always belongs to you. If you were to sell the home and not pay for a full year of property taxes, you would get the remainder of the money that is in your escrow account. However, that money may need to go towards funding the escrow account for your next home.
Why Use an Escrow Account?
Many homeowners like using an escrow account because of the peace of mind that it gives them. It can help you budget for those big expenses so that you are not caught off guard by a big tax or insurance bill down the road.
