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How Does Escrow Work on a Mortgage?

How Does Escrow Work on a Mortgage

When you take a mortgage out on a home, you may find it prudent or necessary to obtain an escrow account linked to the mortgage. This lets you spread your home insurance and taxes over a 12 month period and is automatically part of your monthly mortgage payment, so you don’t have to worry about paying them yourself.

An escrow account linked to your mortgage can save you valuable time and worry and is one of the easiest ways to take care of your home-related payments and fees.

When Are Escrow Accounts Setup?

Escrow accounts are initially set up when you finalize the mortgage on your home. When you pay the holding or closing fees on a property, the seller will usually hold the money until it finally gets deposited into an escrow account which will then be used to pay your taxes and fees. The final lender will usually create and manage this account for you, so it requires little to no work on your part, besides signing the homeowner’s paperwork.

What Are The Benefits of an Escrow Account?

Escrows are an easy way to finance your tax and insurance payments. Instead of one lump sum is due at the end of the year in taxes and insurance, you can spread out those payments over each month. This is done automatically by an escrow account, so you don’t have to anticipate these payments yourself. Instead, a percentage of money from your mortgage payment will automatically go into the escrow account each month to cover these costs.

What is “Earnest Money?”

When buying a home, you usually will deposit what is called “earnest money” to the seller, to show them that you are serious about purchasing the property. This is usually a small percentage of the home price, and the funds will be held by a neutral third party, such as an attorney or other professional, “in escrow” until all of the paperwork for the purchase is finalized. Then, this money will be automatically put into an escrow account to cover your costs. The lender will set this up with your mortgage payments, requiring little hassle from you.

Why Escrow Can Help With Your First Mortgage

Escrow accounts are an important part of the home-buying process, especially for your first mortgage, as they can help break up your insurance and tax payments and require no work on the part of the homebuyer, making them a wise decision for everyone taking on a new mortgage.

How a Correspondent Lender Can Help

Many escrow accounts are made easier with a correspondent lender. This is a specific mortgage holder who will fund your home purchase with their own capital or line of credit, depositing the home payment to the company selling the property, and taking the loan on themselves. Usually, after this, the lender will then sell or refinance the loan to another mortgage broker.

This process allows homebuyers to have a much wider variety of mortgage options, as the correspondent lender can search for the best mortgage lenders and deals on the marketplace once they hold the loan, and can also negotiate much better deals and final prices on the initial property purchase on behalf of the buyers.

Many mortgage companies require a small amount of extra funds to be kept in the escrow account as well, due to unforeseen payments related to the loan or insurance fees. This helps you always maintain a positive balance on your homeowner’s insurance, as well as avoid any unforeseen taxes and legal fees.

Escrows are a hassle and worry-free way to ensure that your home-related payments can be met on time, with money left over each year. Escrow accounts are valuable financial tools for your first mortgage and can help you easily make your insurance and tax payments while giving you peace of mind as well as a financial cushion in case of home-financial emergencies.

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