Many 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’.
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.
Finances to cover a number of payments associated with home ownership are included in Escrow. Payments covered by an Escrow account include:
Property taxes are one of the main items covered by the assets in an Escrow account. While some people are frustrated that they have to pay into an Escrow account, doing so actually ensures that your property taxes will be paid on time and means that you don’t have to budget for them separately on your own.
Within the state of New York, school taxes are based on the assessed value of your property, so finances to cover them are included within your Escrow account as well.
PMI is required when a home buyer purchases a home with a conventional mortgage but puts less than 20% down. This insurance protects the lender’s investment. It typically doesn’t need to be paid for the entire life of the loan and in most cases goes away when you reach a certain threshold of equity in your home, but while you’re paying PMI it is covered by Escrow.
If you are participating in Escrow, once you’ve chosen a homeowners insurance provider and policy, a portion of your monthly mortgage payment will automatically go towards covering your homeowners insurance payment.
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.
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.
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 October 2021.