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Homebuying & Selling
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2 min read
Purchasing a home can be both exciting and overwhelming. You have to make so many decisions—and sign so many documents! Whether you’re a first-time or seasoned homebuyer, you’ll likely consider the option of whether or not to open an escrow account. If you’re new to the homebuying experience, there are several things you should take into consideration when determining if an escrow account is right for you.
1. What is an escrow account?
In a nutshell, it is an account that pools money—from your monthly mortgage payment (which traditionally includes payment, insurance, and taxes)—into an account for the sole purpose of paying your residential property taxes and homeowners insurance.
Opening a mortgage escrow account is a great solution if you have a difficult time saving money or putting money aside for larger distributions. Essentially, you’re putting a smaller amount of funds into an account each month rather than paying a large amount on the front end or at the end of the year.
2. Is it mandatory?
While an escrow account is not mandatory, it is highly suggested by many lenders. There are no penalties for failing to open an escrow and depending on how much of a saver you are, you could potentially earn interest income if you deposit the tax and insurance funds into an interest-bearing account. Ultimately, the decision is yours.
3. Am I an ideal candidate for an escrow?
Homebuyers may be posed with the question of whether or not to open an escrow, but some may argue that first-time homebuyers make the ideal candidate. First-time homebuyers normally aren’t prepared for the big-ticket tax and insurance payments that come along with their new mortgage. An escrow account can be convenient and less stressful for new homeowners.
4. What is escrow balancing?
Each year, your lender will review your account to ensure the escrow portion of your monthly mortgage payment covers the amount of your real estate taxes and insurance premiums, making a determination on whether your account is balanced or overdrawn. For the most part, many homebuyers overpay the account, and the lender ends up sending them a refund check at the end of the year.
Pro tip: If you receive a check for an overage in your escrow account, apply those funds to your principal mortgage balance to pay down your loan faster!
5. What are the benefits of opening an escrow account?
Opening an escrow can give you peace of mind. Throughout the course of a year, homeowners have many responsibilities—planned and unplanned. New homeowners are likely to spend a substantial amount of money during the first year of homeownership renovating, furnishing their home, and making their house a “home.” The last thing anyone wants to think about is spending additional unexpected funds.
When it comes down to it, the choice of whether or not to open an escrow account is based on personal preference and your comfort level with account and money management. Mortgage escrow accounts are just one consideration to keep in mind when you’re going through the homebuying process. Your mortgage loan officer should be able to walk you through the entire process of how an escrow account is established and funded and answer any questions you may have!
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