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If you’re a new homeowner or plan to be one, I’d like to first congratulate you on your journey. However, there will be many real estate terms and acronyms thrown at you, “mortgage escrow account” is one of them.
It can feel like you’re learning a new language, and you have no choice but to learn it, especially since it’s a long-term commitment. Fortunately, it’s easy to understand.
During the property title transfer process, the concept of an escrow account might have been explained, but as a first-time home buyer, the excitement likely overshadowed the details. Months ago, I received an email from my home insurance company stating that if I didn’t pay by a certain date, they would purchase insurance for me at a higher premium.
So, I went to my insurance site and paid the outstanding balance, not realizing I didn’t have to because I have an escrow account with my mortgage lender.
Two months later, I received a refund check. My wife and I looked at each other, wondering why. It wasn’t until I took a closer look at the mortgage payment breakdown that I realized the payments are split into three parts: principal, interest and escrow.
The escrow account is there to ensure that funds for taxes and insurance are available when needed. It’s a strategy to protect both the mortgage lender and the homeowner. The mortgage escrow account can be viewed as a mediator; you are responsible for providing the funds that are included in your monthly mortgage payments, and it will manage the other party.
When taxes and insurance are due, your mortgage lender will disburse funds from the escrow account to cover these expenses. You no longer need to make direct payments to the insurer. That’s the part I failed to comprehend.
Every year, the lender performs an analysis to ensure the correct amount is being collected. If your taxes or insurance premiums change, your monthly escrow payment will be adjusted. If there’s a surplus, you will be refunded the difference. If there’s a shortage, you’ll need to pay the difference.
In summary, the escrow account is an excellent safety.
Don’t make the same mistake I did. Make sure you understand the breakdown of your mortgage payments. Overall, it’s a pretty convenient way to manage your property taxes and insurance payments and it is one less thing to worry about.
Keep your money to yourself and trust the escrow account to handle these payments for you.
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