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The What, Why & How of Mortgage Escrow Accounts

Calculator and Piggy BankMany homeowners who plan for a mortgage payment within their budget are unpleasantly surprised to discover their lender requires an additional amount, paid monthly, called ‘Escrow’.

What is Escrow?

Escrow is basically an account that is separate from your ‘mortgage payment’ where funds are deposited to specifically pay for items that relate to home ownership, such as property taxes and private mortgage insurance (PMI). It is typically an amount over and above the principal and interest portion of what you would consider your mortgage payment. The funds in an Escrow account must be used solely for the purpose they are intended.

Why is Escrow Required?

Often, lenders believe that many first-time homebuyers or those with bad credit need a little extra help managing and planning for additional home ownership costs, such as taxes and insurance. For example, failing to pay taxes can result in eventual foreclosure of a home. Failing to pay homeowners insurance puts the bank’s investment in your home at risk. Essentially, the bank ‘owns’ a good portion of your home, and they are protecting their investment by insuring taxes and insurance are paid.

How Can Escrow Be Avoided?

In some cases, if your down payment is 20% or more, lenders will not require you to pay escrow. However, this can vary from lender to lender, and some can be particularly strict with first-time homebuyers, even if they have a large down payment in hand. In addition, certain types of loans, such as Federal Housing Administration (FHA) loans, require that the lender maintain an escrow account for the lifetime of the loan.

Learn More About Escrow!

If you’re in the market for a new home, understanding Escrow is very important. You don’t want to be surprised when you get to the closing table and find out your monthly payments are higher than you think!

Give us a call at (518) 782-1202 or contact us online to find out what you need to know about Escrow before you buy a home. Our mortgage brokers would be happy to answer any questions you might have and help you better understand how Escrow may or may not impact the mortgage programs you are interested in and the amount of home you can afford. Contact us today!

Editor’s Note: This content was originally published in 2014 but has been updated as of September 2016.

Posted in FAQs on Friday, September 9, 2016 by Maple Tree Funding