Five Questions About Escrow - Answered HERE


What to know about escrow:

Are you fretting about your escrow account, what it means, or what it does?

We have brought in the experts to get the scoop on everything you need to know!

Let us set your mind at ease and give you the knowledge to take charge of where your money goes and why

1. What is escrow and why do I need it?

Escrow is a process to pay your home insurance and or property taxes more efficiently!

You make monthly installments into an account held by a third party, which is applied to your insurance and property taxes annually. 

This guarantees that annual premiums and property taxes are paid.

The money paid into an escrow account is usually managed by a variety of service providers.

These service providers often include an escrow company, escrow agent, or mortgage servicer.

Generally, your situation will determine what type of service provider will manage your escrow account.

The best part is it makes budgeting easier for you! 

And that escrow account acts like a savings account, in that you make a monthly payment towards your insurance and property tax over twelve months, rather than making one large payment! 

2. Is escrow required?

This is completely dependent on which home loan type you have.

At the time this was written…

For conventional loans, escrow is required by the lender if less than 20% of the principal is paid. 

After 20%, escrow is optional. 

On the other hand, VA loans require 10% of the principal and a strong credit profile to have the option of opting out of escrow payments.

FHA loans require ALL borrowers to have and pay into an escrow account. 

If a customer chooses to pay annual premiums and taxes on their own, they are responsible for setting up payment with each vendor (insurance provider and local government) and must provide proof of payment to their lender once the providers are paid. 

3. How do we determine escrow?

Escrow is determined by the total annual insurance premium and/or property tax bill divided by 12 (for monthly payments). 

For example, if your total home insurance premium is $600 annually, and your property tax bill is $1200 for the year, you divide each amount by twelve. Then you add these figures.. See graphic. 

Based on this math, your insurance escrow will be $50/month and property tax escrow will be $100, for a total escrow of $150. 

The goal is so that you will be covered when insurance and taxes are due.

No surprise fees at the end of the year to throw you off.

Escrow Explained Equation

4. What is the minimum balance and why is it necessary?

The minimum balance held in escrow is ⅙ of your total insurance premium and/or property tax bill. 

Using our previous figures, your minimum escrow balance for insurance and property tax would be $300. 

While having a minimum balance on your escrow account may seem unnecessary, that balance may be the difference between you having to make an additional payment out of personal savings, should there be an unanticipated fee.

The goal is to serve as a safeguard for the account owner.

5. What is an escrow review?

Escrow is reviewed annually. 

Having an annual escrow review is to confirm your monthly payment covers your insurance premiums and property taxes while maintaining your account’s minimum balance. 

Your insurance premium or property taxes can change annually, which will determine if your monthly escrow will go up or down. 

Hopefully, you can rest easy knowing more about your escrow account, what it’s used for, and how the payment is calculated.

Do you still have lingering questions?

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