Oh boy, this ones a biggy. This week we’ve decided to tackle the beast known as Escrow – what is commonly known as one of the more murky things to grasp in the bright world of mortgage. After hours of research, we have composed a guide to hopefully make Escrow simple.
So, to begin, what is Escrow?
Think of it like a separate little account, like a sort of piggy bank or change jar. Every month you put a little money from your mortgage payment into it, and it slowly grows. Simple! But why do you need this piggy bank in the first place?
The Escrow account helps with simplifying paying for taxes and insurance. When things like property taxes become due, these will be paid for with your escrow account. So you don’t have to worry about due dates and sending off money! All you need to make sure is that the account always has twice the monthly amount in is as a minimum. This provides a safety cushion. So if you need to pay $250 a month, your minimum will be $500.
The point of an Escrow account is pretty straight forward. But there are other aspects that start to get confusing. Take a deep breath, and lets dive in.
The amount that you pay into your account will be determined by a yearly analysis. This analysis will gauge your insurance and taxes, your escrow balance, and whatever payments have been recently made with it. The amount you will owe is predicted, and is then divided into 12 monthly payments. You will receive a letter from your lender showing you the analysis and your monthly amount.
Now, this is subject to change every year, especially after the first year of owning the house. When this does change, you will either get a surplus or a shortage.
A surplus means you will have to pay less every month, as the costs have fallen. Nice!
A shortage means you’re expected to owe more, meaning you have to pay more monthly. Not as nice!
But do not worry – these aren’t any reflection of you, and won’t affect your credit. These are only done to ensure your escrow account doesn’t fall below the minimum, maintaining that safety cushion. If you have a shortage, just expect to be paying a little more every month. If you have a surplus, however, you could get a check in the mail! All of this is done by the wizards at your lender, so you never have to worry about figuring it out.
So, to recap: An escrow account is a sort of mortgage piggy bank that you pay into regularly, and is used to pay taxes and insurance. The amount is determined by an annual analysis, and can increase or decrease.
Not so tricky now, eh? We hope this simplified escrow accounts for you. You shouldn’t need a degree in finance to understand escrow. We are your local mortgage experts, so if anything perplexes you, we are here to help! Visit our website or give us a call at 802-863-2020. We’ll be able to answer any and all questions you may have!
**Also, Escrow comes from the French word escroue, meaning a scrap of paper or parchment. I was curious too.