The mortgage buying process has its own language, which often includes key terms such as contingency, disclosure, earnest money and escrow.
But while you might have a general idea of what some terms mean, you might know little about escrow accounts. In fact, we commonly get asked about them!
To put it simply, an escrow account is an account that holds funds before and after closing on a house.
You might ask: What does an escrow account do? And more importantly, do I need one?
What does an escrow account do?
When a seller accepts an offer to buy their house, the buyer typically puts down an earnest money deposit. This deposit shows that they’re serious, and it might range from 1% to 3% of the purchase price or a flat $500 or $1,000.
Regardless of the amount, the title company handling the transaction opens up an escrow account to hold these funds. The account remains open until closing, at which point funds are applied to either a buyer’s down payment or closing costs.
After closing, a lender or mortgage servicer might set up another escrow account to hold payments for property taxes and insurance (homeowners and mortgage insurance).
Keep in mind that a mortgage involves more than repayment of principal and interest. You’re also responsible for homeowners insurance and property taxes. For convenience sake, taxes and insurance are often included as part of the monthly mortgage payment, and then held in an escrow account until due and paid on a borrower’s behalf.
Property taxes can increase or decrease from year to year, though. So each year your lender conducts an escrow analysis to determine whether you’ve paid enough into the account.
An analysis might reveal a surplus in your escrow account, in which case your lender sends you a check. On the other hand, if an analysis reveals a shortage, you’ll pay 1/12 of the outstanding amount over the next year. Therefore, you might see a slight increase in your mortgage payment
Is an escrow account required?
Generally speaking, you will need an escrow account if you’re putting down an earnest money deposit.
But escrow accounts aren’t always required after closing.
You might elect “not” to have an escrow account, and instead save and pay your property taxes and insurance on your own.
This approach, however, will depend on your mortgage loan. FHA loans require an escrow account after closing. In addition, you’ll have to meet certain requirements before opting out with other loan programs. For example, conventional loan borrowers with less than a 20% down payment are required to have an escrow account.
Do I have an escrow account?
If you have a mortgage and you’re not paying property taxes or homeowners insurance yourself, then you likely have an escrow account. To find information about an existing account — including your balance and payment history — sign into your online mortgage account or contact your lender or mortgage servicer.