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Understanding Escrow Accounts

Posted by Melvin Monachan | Nov 15, 2018 | 0 Comments

If you are in the process of obtaining a home loan to purchase a new home, your monthly mortgage payment will likely have a great deal of influence on the home that you choose--if you can't comfortably pay the mortgage payment, then you likely won't choose to purchase the home. It's important to understand, however, that when you purchase a home there are other expenses which must be accounted for. In some instances, you may be required to maintain an escrow account with your lender, which may be a foreign term to you.

What is an Escrow Account?

When purchasing your home, the principal and interest included in your mortgage are not the only expenses that need to be paid. An escrow account is often required by a lender in connection with your mortgage and can add quite a bit to your monthly mortgage payment.

The purpose of an escrow account is to provide an easy method of paying home-related expenses such as property taxes and homeowner's insurance premiums. Rather than paying a single check for these expenses every year, an escrow account takes the total cost of these expenses and breaks them up into twelve equal portions--one for each month of the year. This cost will then be added to the principal and interest portion of your mortgage to reflect your total monthly payment.

An escrow account attempts to make your life as a homeowner easier by taking you out of the insurance and tax process, as the lender would deal with the insurance agency and tax assessor directly rather than you having to pay the bills yourself. You should always take care, however, to make sure that your lender is applying the payments correctly. Always be on the lookout for any notices about taxes or homeowner's insurance premiums not having been paid.

While property taxes and homeowner's insurance are the two most common expenses included in an escrow account, you may also be required to have additional payments in escrow. These payments can include

  • flood insurance if your house is located in a flood zone, or
  • private mortgage insurance (PMI), which is an additional payment you will be required to make to the lender if you do not have a down payment equal or greater than twenty percent of your loan value.

Your Escrow Account Can Change

Whenever you purchase a home, it's important to understand that your escrow account can change every year. If your property taxes were to increase, for example, and your property taxes were being escrowed in your mortgage, your escrow account would increase by the amount that your property tax increased. Similarly, if you made a claim with your homeowner's insurance and experienced a hike in your insurance premium, your escrow account would be adjusted the next year to reflect that change. This change can result in a change to your monthly mortgage payment.

Have Questions, or Ready to Close? We're Here to Help

If you are applying for a home loan and have questions about escrow accounts, or if you are ready to close on the purchase of your home, Melvin Monachan is ready to assist you with your real estate needs. To schedule an appointment to speak with a member of our legal team about your questions, or to schedule your real estate closing, fill out an online contact form or call (347) 620-0565 today.

About the Author

Melvin Monachan

Melvin Monachan is the founder of The Law Office of Melvin Monachan, PLLC, a full service, real estate law firm representing individuals, investors and corporate entities in all aspects of real estate law. On the transactional side, Melvin represents purchasers and...

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