August 05, 2015

Getting Down to Brass Tacks: Escrow

Escrow Coins Stacked

You've done your homework and are ready to become a homeowner.  You've determined how much you can afford along with your rate and terms. And just when you thought you had all the real estate acronyms and lingo down, a new term came along:  escrow.

Simply put, escrow refers to money that's held by an impartial third party on behalf of transacting parties – a holding tank of sorts.  In the real estate world, lenders open an escrow account – also referred to as a reserve account – in your name to make payments on your behalf for real estate taxes and insurance premiums.  Why do you need this escrow account?  Because this provides added assurance to your lender that your tax and insurance payments will be made.  Many lenders require that an escrow account be established under the terms of your mortgage.

How it works:
Your lender will set up an escrow account for your mortgage.  Each month, as part of your mortgage payment, you'll also pay a portion of your estimated tax and insurance annual costs. Your lender will deposit this amount into your escrow account and will pay for both of these items when they are due.

  • Lenders will estimate your homeowners insurance premium and real-estate property taxes yearly. It's important to remember that it's an estimate so at the end of the year you may get a refund or have to pay extra for a shortfall.
  • Your taxes and insurance premiums will change over time and your escrow payment estimate will be adjusted yearly to reflect any changes.
  • Check your year-end escrow statement carefully to make sure your bills are being paid and there are no mistakes. If you have questions or find a problem, contact your lender immediately as these payments are ultimately your responsibility.

Never hesitate to ask your team questions about words, costs, processes, or documentation.  This is their job and this is one of the biggest investments you'll ever make.

Read more blogs in our get down to brass tacks series about other important topics and visit My Home by Freddie MacSM where we discuss it all.

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