You’re in the market for buying a home and hear about this word, escrow. What does it mean and how does it work?
How does an escrow account pay homeowner’s insurance?
An escrow account is set up to hold your property tax and homeowner’s insurance payments. Your lender will break these annual payments down to monthly payments so it’s more manageable for you financially. Based on the amount of your property taxes and homeowner’s insurance premium, they will tell you how much you need to put into the escrow account every month to prepare for the end payment. They will hold this money in escrow as it accumulates and when the payments come due, the money is ready, and it is not a burden to come up with such a large payment on the spot. These escrow payments are made to your lender in addition to your mortgage payment every month.
How much are my escrow payments?
Property taxes and insurance change over time and these are estimated based off previous years and other data. Therefore, when it comes time to make the final payments, you may get a refund if you paid too much in escrow or you may have to pay in the difference if it was more than projected. Your escrow payments will adjust yearly to reflect any changes.
Who should use an escrow account?
An escrow account is a great option to manage your money and make sure the payments are made on time. Specifically, for new homeowners who are new to making these payments or individuals that need guidance with budgeting.