Unraveling the Intricacies of Homeownership: Your Guide to Escrow Accounts

We welcome you back to our comprehensive guide to homeownership! As you navigate this new terrain, you'll encounter numerous terms and concepts that might seem overwhelming. Here at CrossCountry Mortgage, we're dedicated to helping you make sense of these complexities. Today, we're diving into the nitty-gritty of escrow accounts: what they are, and how they serve as an advantageous tool for homebuyers.

Understanding the Essentials

Primarily, an escrow account serves two purposes. Firstly, it safeguards the earnest money deposited by the homebuyer until the transaction is complete. Secondly, it securely retains the homeowner's funds earmarked for taxes and insurance post-closure. While homebuyers can initiate the creation of an escrow account, it is often the buyer's real estate agent who takes on this responsibility. Please note: Throughout the buying process, a specialized company or agent, who may also be your title company, typically manages the account.

Unveiling the Process

Let's consider a scenario where you've found your dream home and you've made an earnest money deposit to signal your interest. Instead of going directly into the seller's account, this deposit is placed in an escrow account. Upon the closing of your housing transaction, these funds contribute towards your down payment and closing costs. Once you're a proud homeowner, your monthly mortgage payment will include an amount directed towards the escrow account. Your loan servicer will distribute your mortgage payment among several categories, such as:

• Principal and interest on your mortgage
• Property taxes
• Homeowner's insurance
• Mortgage insurance

However, it's important to remember that your escrow account doesn't cover utilities, home repairs, or HOA fees.

Is an Escrow Account Mandatory?

While not universally compulsory, an escrow account is sometimes required depending on your loan type or lender, serving as an extra security measure. For instance, an FHA loan may require an escrow account. Regardless of the requirements set by your state, lender, or loan, it's generally beneficial to maintain an escrow account.

Yearly Payment Assessments

Each year, your bank is updated with information about your property taxes and insurance payments. The bank then conducts what is commonly termed an "escrow analysis." Should any increase in taxes or insurance cause a shortage in your escrow funds, you would owe the deficit. However, you're not liable for this payment until the bank notifies you of the due amount. You can opt to settle the entire shortage in one go or disperse it across the next year's payments.

What Happens When There's a Surplus?

If your property taxes decrease or your payments are overcalculated, you'll end up with an excess in your escrow account by the year's end. The bank will pay the necessary amount to the municipality, and the surplus funds are returned to you. You have the option to receive a check for the surplus or let it remain in your escrow account to buffer any potential shortages in the coming year.

Planning for Future Payments

Predicting whether you'll need to increase your contributions to your escrow account can be challenging. For those who like to be prepared, keep an eye on any updates from your insurance company or tax authority throughout the year and adjust your budget accordingly.

Still have questions? We're here to help! Speak to a Mortgage Advisor today for a no-obligation consultation.