What are Escrows?
When you are buying a home you will hear escrows discussed throughout the loan process. By definition an escrow is when money is held by a third party until it needs to be used to complete a certain condition. During the home buying process deposits on your real estate purchase will be held in escrow until closing. However you will see additional escrows on your loan estimate as part of your mortgage. In applying for a mortgage the most common types of escrows you will encounter are property taxes, homeowners insurance and pre-paid items.
Property Tax Escrows
Property taxes are typically collected by your city or town once or twice a year. However, when you escrow your property taxes they are collected monthly with your mortgage payment and held in an escrow account with your mortgage servicer until the payment is due. This payment will be made directly by your lender/servicer to your city or town office.
When you close on a new home you may need to reimburse the seller for a portion of the real estate taxes they have already paid. You may also need to pay a tax bill in full if it’s due within 60 days of closing.
Homebuyers are sometimes surprised with what is required at the closing table to initiate the escrow account. The lender managing the escrow account will require a minimum balance be kept in the account. The needs of the escrow account and tax payment requirements will be visible in the closing costs required.
If you put 20% down and only borrow 80% of the purchase price, you will have the option to pay your own taxes directly to the town rather than escrow. Any government loan including VA, FHA and USDA will require an escrow account.
Another part of the escrow account is for homeowners insurance. Your lender will require a certain level of insurance coverage on the home to protect the investment. At the closing table you will be expected to pay one year of homeowners insurance in full as well as a couple months of the monthly payment in advance. This will ensure that the escrow account is adequately funded when the bill is due the following year.
Other Pre-paid Items
When you review your closing statement there may be other pre-paid items that are required. Those include:
- Odd days of interest
- HOA dues
- Condo fees
If these scenarios apply to your property your loan officer will be able to outline the pre-paid amount and the expectation going forward.
Escrow Account Surplus
Allocating significant funds to escrow accounts as part of the home buying process can feel overwhelming. It is important to understand that funds in escrow act as added security for the lender to make the necessary payments however the money is yours. Should you sell the home down the line or pay off the mortgage, any surplus in the escrow account would be returned to you.
The benefit of having escrow accounts as part of your mortgage is the ease of having someone else handle the payments for you. This is one less thing you have to worry about as a new homeowner. However if you’d rather not escrow your payments you can discuss with your loan officer early in the process what your options are and if you qualify to skip the escrow.
If you are looking to buy a home in the current Upper Valley real estate market, you need a team of local real estate experts on your side. Our team is well versed in a variety of loan programs including fixed mortgages, ARMs, VA loans, FHA and more! We have the privilege of partnering with the best local agents, appraisers and attorneys the Upper Valley has to offer. When you work with Legacy Mortgage you are working with the best local professionals from beginning to end. Reach out to the Legacy Mortgage team to get started get the loan process started. Call us today, 603-643-7400.