Escrow: How Much Do You Really Know

Escrow is a big factor in home ownership, so don't be caught off-guard when closing day finally comes. So when you are about to buy a house or refinance a property, you will receive a good faith estimate close to when you "go into" escrow. This estimate includes a line item for the escrow account information. What this essentially is is an extra fund used to pay for property taxes and insurance.


Back in the dark ages when a person wanted to buy a house, they would get a traditional home loan. However, the payments towards property taxes and insurance would come out of their own pocket. It wasn't uncommon that during tax time homeowners would be falling a bit short on their payments.


Because this happened quite frequently, mortgage lenders began offering, and sometimes requiring, the borrowers to pay these taxes and insurance payments into a separate account. This became known as an escrow account, and as the payments became due, the mortgage lenders would pay them for the borrower.

The mortgage lender would also use this fund to collect interest. When you consider the amount of houses needing an escrow account in one area, pool them all together, the lender will be earning a ton of money. As this system became more integrated, some mortgage lenders started to make the borrower have their money upfront. Occasionally, the borrower would receive a quarter-point discount on a mortgage interest rate for escrowing their taxes and insurance.


During closing time, buyers would have to throw down a significantly large amount of cash to begin an escrow account, sometimes up to six months’ worth of taxes and insurance. Chances are they are not thrilled about the interest lost by not having these funds invested. Since these issues are real, a good portion of borrowers choose not to escrow these monies when the lenders give them the option.


What's Best for Buyers?


Generally this is a smart move for first-time buyer, and or those who are strapped financially. Because most people do not already have a separate account for taxes and insurance, we take a beating come tax time. It's smarter to budget and save this money during the year, to escrow these funds with the lender is a good way to reach this goal.


The choice is always yours. Just think how nice it would be to not have to worry about the bills and scrambling around come tax time to find a ton of money to pay. Since you already have the funds, it's not even a concerning problem at all!

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