Purchasing a home can be both exciting and overwhelming. 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.
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 property taxes and home insurance.
Opening a mortgage escrow account is the perfect 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 multiple times per year (12 times to be exact), 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 most 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, but 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 the mortgage. It’s convenient and less worry for the new homeowner.
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 writing a check at the end of the year. A good rule of thumb should you receive a check for the overage is to apply that check to the principle balance.
5. What are the benefits to opening an escrow account?
Point blank—opening an escrow gives you peace of mind. Throughout the course of a year, homeowners have many responsibilities—planned and unplanned. New homeowners are likely to spend a bulk of money in the first year renovating, furnishing their home, and making their house a “home.” The last thing anyone wants to think about is spending additional funds not planned for.
When it comes down to it, the choice 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 top of mind when in the market to buy a home.