When you buy a house, unless you’re buying it with cash, you’ll need a mortgage or a home loan. Getting a home loan means that you’re going to have to pay for a variety of other costs aside from just the price of the home itself.
When you’re shopping for a loan, it’s smart to be careful about the fees you’re going to have to pay and use them as a source of comparison for lenders. For example, you’ll have to pay one-time closing cost fees, which can be anywhere from2-5% of your total purchase price.
Other fees include your title fees, document preparation fees, and your credit report fee.
Then, there are ongoing fees, like your interest. There are mortgages with fixed-rate and variable-rate interest, and things like your credit score, the type of loan you get, and your down payment can all influence your interest rate.
Something else you’ll hear when getting a mortgage is escrow. An escrow account will be used to hold funds for your property taxes and your homeowners’ insurance. Homeowners insurance can vary quite a bit in price depending on factors like where you live and your home itself. For example, home insurance in Mississippi is around $1,537 a year on average, while the national average is just $1,211. These are factors influencing your escrow account, and we will talk more about this below.
How It Works
When you close on a mortgage, it’s possible your lender will create an escrow account, where part of your payment for your monthly loan is deposited. The money in this account covers some of the costs that come with home ownership.
The goal of setting up an escrow account is to make sure that payments are being made on time to relevant third parties, like insurance companies and county tax officials.
Another way to look at it is that an escrow account is a savings account, and it’s managed by the servicer of your mortgage. These accounts are sometimes referred to as impound accounts.
You’re sending money to make these payments through your servicer every month rather than being required to pay a big bill one or two times a year.
Since property taxes and insurance premium amounts can change from year-to-year, your escrow payment and your total monthly payment change as needed.
When you close on your loan, your lender collects enough money to establish the escrow account. Every month, as you make a mortgage payment, part of it goes into your escrow account, so your servicer can pay your taxes and insurance bills when they’re due.
As a note, your mortgage servicer is the company you’re making your payments to for your mortgage, which may or may not be the same as the lender you closed your loan with.
What If Your Loan Doesn’t Have an Escrow Account?
In some places, an escrow account is legally required, but if your loan doesn’t have one, then you’re responsible for paying these large expenses, so you’ll have to budget for them. If you don’t pay your property taxes, you could face penalties, and a tax lien could be put on your house. You might also face foreclosure.
If you don’t pay taxes or insurance, then your lender can also add an escrow account to your loan, add the amounts to the balance of your loan, or buy homeowners insurance for you and then bill it for you. If your lender buys homeowners insurance, it’s called forced-place insurance. It’s typically more costly than if you were to pay your homeowners insurance on your own.
Even if your lender doesn’t require that you have an escrow account as part of your mortgage, it’s not a bad idea to ask for one. It’s going to make things easier on you, and you can plan ahead as far as your budget and not worry about big insurance premiums or a larger bill due for your property taxes.
If you have a USDA or FHA loan, or any type of loan backed by the government, a mortgage escrow account is required. For conventional loans, it’s up to the lender.
Escrow Analysis
The servicer of your mortgage estimates the amount that needs to be paid for your tax and insurance bills. The estimate will be provided to you during the closing, and it’s based on your insurance company and the taxing authority, or maybe previous tax and insurance bills.
Your servicer will look at your account annually to make sure that you’re paying the appropriate amount to keep the minimum required balance.
However, this is just an estimate, so the amount can be over or under-estimated, which can be an escrow overage or shortage.
If you have an overage and you’re paying too much, you get a refund.
If there’s a shortage, you usually have some options to make up for what’s owed.
You can go ahead and pay the shortage up front. You can also pay it over a 12-month period with your regular payment, but not every servicer provides this option.
If you have a shortage, the amount you’re paying every month for escrow is going to increase because the payment is recalculated based on a new amount.
What If You Don’t Have a Mortgage?
If you’re a homeowner but don’t have a mortgage, you still have to pay your property taxes and homeowners insurance. You can set up an escrow account if you prefer to manage these costs that way.
If you meet the requirements of your mortgage servicer and you don’t want an escrow account, you may be able to opt out. Generally, a servicer requires you to send a formal request in writing. If it’s approved, then you get the remaining balance as a check.
There are certain requirements to opt-out. For example, if you have a Fannie Mae conventional loan, you can’t have a payment that’s 30 days or more late in the past year or 60 days late or more in the past two years. You also have to have more than 20% equity in your home, and finally, your loan will probably have to be at least a year old. That’s just an example of Fannie Mae’s requirements, so these may not apply in your situation.
