Many home buyers are surprised to find that their monthly house payment is more than the payment calculated to pay back their loan. That’s because lenders often require buyers to put money into escrow.
The easiest way to understand escrow is to think of it as a monthly budget plan so that you won’t fall short of funds when your tax, PMI* and insurance bills are due.
Money in mortgage escrow is set aside with a third party. It can only be used to pay for property taxes, PMI and homeowners insurance. Escrow is added to your monthly payment for principal and interest.
How escrow is calculated
When you close on your mortgage, the lender looks at the estimated annual cost of your property taxes, PMI and homeowners insurance. The amounts are added together, then divided by 12 to figure your monthly escrow cost.
For example, if the premium for your homeowners insurance is $1,000, your PMI is $960 and your property taxes are $2,800 for the year, they total $4,760. Divide $4,760 by 12 and you arrive at $396.67. This amount will be added to your mortgage payment for escrow.
Advantages of escrow
Many borrowers find it easier to save one-twelfth of their property taxes and insurance each month than to come up with large sums when the bills come due.
When the bills are issued, a copy goes to your lender and payment is sent directly from your escrow account. This gives you the assurance of knowing that your insurance coverage won’t lapse and you won’t incur penalties for late payments on property taxes.
Lenders like escrow because it means the homes they finance are insured and remain up-to-date on taxes, which lowers their risk.
We’re here to help
If you have any questions about mortgages—including escrow payments—just ask! Call us at 800-991-2221, and we’ll provide the answers you need.
Consumers helps more than 1,000 members finance land, homes, and home improvement projects each year. When you need a mortgage or home equity line of credit, call us at 800-991-2221. We’re here to help you get the home of your dreams!
*PMI = private mortgage insurance, if applicable