What is Escrow?
It’s important to first define escrow before really understanding how it relates to your mortgage. There are different uses for escrow accounts, but escrow accounts are very commonly established along with a mortgage. After mortgage closing, an escrow account is simply put into place to have a neutral third party (lender) hold onto funds to pay for property taxes and homeowners’ insurance for a financed property. Having an escrow account makes the home financing process a less stressful experience because the homeowner doesn’t need to worry about those tax and insurance bills. As a part of the mortgage payment, the borrower contributes funds to the escrow account. The financial institution then handles tax and insurance payments. Financial Institutions stress obtaining an escrow account to make sure that all of your bills and fees are being taken care of, which in turn, ensures a safe homebuying process.
Since escrow is an unknown topic to many, there are many standard procedures that occur within your escrow account that you may not have heard of. One of those processes is an escrow analysis. The financial institution that houses your account will complete a yearly review of your escrow account. If they determine that you paid too much toward your escrow account, you will get money back at the end of the year. This is called an escrow refund. If your financial institution determines that your escrow account is headed toward a negative balance. They will ask you to contribute more money every month. This is called an escrow shortage.
Although your financial institution completes that yearly review, it is important for you to periodically check your escrow account throughout the year to identify any shortages and to be prepared for a change in payments. Your financial institution may raise your monthly escrow payment. They will do this if they determine that your escrow account is heading towards a negative balance.
If you choose to refinance your home, be prepared – refinancing will require a new escrow account. Read this article by RIS Media to learn more about what happens with your escrow account when you refinance
All-in-all, an escrow account is a great way to keep yourself on the homebuying track. Financial institutions are knowledgeable on these topics and want to help you with any questions you may have. Understanding how an escrow account can work for you and your finances will help you purchase your dream home!