This account will be used to make deposits for private mortgage insurance (PMI), home insurance, property taxes and other types of insurances that are required.
Escrow accounts are maintained by us to collect tax and insurance payments that are not part of the home loan. The annual cost of these items will be divided into a monthly amount, which is then added to your mortgage payment. The excess you pay each month is put into your escrow account.
Escrow accounts are important because they give us assurance that the state will not take the property for non-payment of taxes, and that the home will not be destroyed without adequate coverage. People who have a low down payment are usually considered a higher risk, as they have less of their own money in the property.
Escrow accounts are meant to protect us, but they can also be beneficial to you as a homeowner. With property taxes and insurance paid each month, you will not need to come up with a large sum of money once a year.
You should still keep an eye on your escrow account balance and payment history, as you will still be responsible for paying these bills if we or mortgage servicer fails to do so. Your monthly statement will give you your escrow account balance. We are also required by law to review your escrow account annually to ensure the right amount is being collected. If too little is collected from you to pay these items, we can raise your monthly payment. If extra money accumulates in the account, you will be refunded.
In some cases, you can set up your own escrow account, but we usually charge a higher interest rate for this, so you may want to let us take care of this.
As an example of how an escrow account works, assume you have a $1,200 property tax bill each year and a $600 annual home insurance premium. We would collect $150 from you each month ($1,800 divided by 12). This escrow payment is added to the principal and interest payment for your total mortgage payment.
If you have an escrow account, your monthly mortgage payment can fluctuate if your home insurance or property taxes change, even if you have a fixed-rate loan. This change will likely be small, but it can be large, depending on your situation and area.
The initial start-up costs for an escrow account will increase the amount of money you need to bring to the table when you get a loan, as most lenders require that you pay a few months of tax and insurance payments when you close.
If you choose to do so, you can request us remove the escrow account requirement once you obtain a certain amount of equity in your home.