What is escrow? “Escrow” is a term thrown around a lot in the mortgage industry, but to many clients it is a mysterious word their loan officer says when asking, “Would you like to escrow?” It can throw any first time buyer for a loop in a process that can already seem overwhelming. So what does it mean to “escrow” and what are the benefits? Escrowing typically involves the monthly tax and homeowner’s insurance payments, as well as private mortgage insurance. Most of our borrowers do choose to escrow these payments, but perhaps it’s not for you. So we will unravel the mystery to help you decide which option is best for you!
If you choose to NOT escrow, your monthly mortgage payment will consist of just the principal and interest. You will personally pay your property tax bill to your town office, typically two to three times a year. You will also pay your homeowner’s insurance directly to your insurance agency on a frequency based on what you establish with them. This can seem like a lot of work but is an option for borrowers who may like to have personal control over these payments.
If you choose to escrow, your total monthly mortgage payment will include these items as well as the principal and interest for the loan. The payment goes directly to your lender each month and they will hold the escrowed amount until the taxes and insurance bills are due. As an example, say your tax bill is due twice a year. For the first six months of your loan you will pay the lender a monthly amount for taxes, and each month the escrow account grows by that amount. At the end of the six months and the tax bill is due, the escrow account will have enough in it to pay the bill. The lender will then pay the town office the tax due for you. The same applies to the homeowner’s insurance. The lender takes care of these bill payments which can take a lot of headache away, all by just including it in your regular monthly payment!
When choosing to escrow you will also “fill” these accounts initially at closing, paying for a full year of homeowner’s insurance up-front, as well as the first month for the escrow account and approximately six months for the tax escrow account. This ensures the first payments are made and the future monthly payments will apply to the next insurance and tax bill.
The mortgage process can be overwhelming, and we’re here to make it easy and convenient for our borrowers. If you have any questions about what escrow is and whether it’s the right choice for you, feel free to reach out to any of our loan officers here at Title Mortgage Solution!