What is an Escrow Account, and do I have to have one?
Why does my mortgage have an escrow account?
Homeowners typically pay extra money into escrow accounts every month, as a part of their home loan payments. Your lender collects one-twelfth of the estimated annual bill for taxes and insurance each month and adds them to your monthly principal and interest payments. Don’t worry! Your lender then pays those bills to the municipality and your hazard insurer when they are due. Why would your lender want to pay these bills for you, with your money? When you borrow money from a lender to finance your home purchase, the property is collateral for your loan. If you don’t pay your property taxes, there may be a lien placed on the property, and lenders want to know that your house (their collateral!) is insured so that it can be repaired or replaced if damaged.
Do I have to have an Escrow Account?
Many homeowners prefer their lenders to handle their insurance and tax payments this way so that they don’t get caught unprepared for a large annual or semi-annual bill. Your loan program and your lender may be require you to have an escrow account. FHA loans will require escrow account. VA loans aren’t required to have escrow accounts, but the most lenders offering VA loans do require them to make sure the property is insured. Conventional loans vary as to escrow account requirements, and it’s up to the lender to decide if escrow account is required, but we generally see it on loans under 20% down.
Keep an Eye on Your Escrow Accounts
Federal law requires your lender to send you an annual statement detailing the transactions in your escrow account including the amount collected and dispersed. Homeowners insurance premiums and property taxes are adjusted over time, so don’t be surprised when the amount of your escrow payments changes from time to time. In your annual statement you’ll see if you have a shortage or an overage in your escrow account. Depending on the amount of the difference between what’s been collected and what has been paid, you’ll get a refund or be required to make up the difference with a one-time payment or with increased escrow payments. Some states require lenders to pay interest on the money collected in escrow accounts. Check with your lender to find out if your funds are eligible for interest payments.
Paying Bills With Escrow Accounts
Property tax bills and homeowner insurance bills are typically sent directly to your lender, but ultimately, these bills are your responsibility. Check your mortgage statements to see that the bills are being paid.
Can I cancel an Escrow Account?
Some lenders only require that you have 20% in home equity, and a good record of on-time payments. Some lenders will require your loan to be at least a year old. Before you choose to cancel an escrow account, remember that if you opt out of an escrow account, you’ll need to be organized enough to pay your taxes and insurance in full, and on time, in one or two lump sums each year.