When you get a mortgage, there are many terms that may be new to you. If you’re new to the home-buying process, you may not be familiar with escrow. Our financial educator and home loans team member breaks down what it is, how it works and how it can benefit you as a home buyer, seller or homeowner.
What is an escrow account?
A mortgage escrow account is an arrangement with your mortgage lender to ensure payment of your property tax bill, homeowners’ insurance and, if needed, private mortgage insurance (PMI). Most conventional mortgage’s lenders require PMI if your down payment is less than 20%.
The yearly and monthly costs for your escrow account will be estimated during the mortgage application process and finalized at closing. To come up with the amount, the lender will calculate how much property taxes are likely to be for a year, along with the quote you receive for homeowners’ insurance and the expected PMI costs, if applicable.
Escrow account holds
Property taxes are collected in the escrow account monthly to ensure that these taxes are paid in a timely and consistent manner.
Homeowners insurance safeguards your home against unexpected events. Through an escrow account, your insurance premiums are consistently paid to protect your property.
Other costs depend on your specific situation.
The amount required for escrow is a moving target. Your tax bill and insurance premiums can change from year to year. Your servicer will determine your escrow payments for the next year based on what bills they paid the previous year. To ensure there’s enough cash in escrow, most lenders require a minimum of 2 months’ worth of extra payments to be held in your account.
Your lender or servicer will analyze your escrow account annually to make sure it is not collecting too much or too little. If the analysis of your escrow account determines that your lender or servicer has collected too much money for taxes and insurance, you will receive what is called an escrow refund.
If the analysis shows the institution has collected too little, you’ll need to cover the difference. You may be given options to make a one-time payment or increase the amount of your monthly mortgage payment to make up for a shortage in your escrow account.
An escrow account is a valuable part of a mortgage that assists borrowers in effectively managing property-related expenses. By providing financial predictability and ensuring timely payments of property taxes and insurance, escrow accounts contribute to a smoother homeownership experience. Tinker Federal Credit Union is committed to guiding you through the intricacies of this process, ensuring that your investment remains secure and well-maintained.
Article by Kara Robinson, TFCU Financial Educator
About the author
Kara Robinson started with Tinker Federal Credit Union as a teller and earned a coveted leadership development role within the credit union that lead her to the position of Financial Educator. Kara enjoys helping others and has a passion for financial education. Learn more about TFCU’s Financial Education team here.