All you need to know about Mortgage Escrows.
Buying a house or property can be a complicated process. Even if you have bought a property before, nothing can quite prepare you when you are jumping into the real estate market. If you are one of those people who do not quite understand the process of buying a house, you have come to the right place.
One of the hard-to-understand elements in the house or property buying process is being in escrow. But what does escrow mean on a mortgage or what is escrow on a house?
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What is Escrow on a Mortgage?
Escrow is the process in which a neutral third party mediates a real estate deal and holds all the money and property “in escrow” until both the sides have agreed that the conditions to close the sale have been met.
This third party service is usually mandatory when purchasing a home. When a buyer and seller initially form a purchase agreement, they select a neutral third party to act as the escrow agent for them.
The escrow agent then collects a deposit that is a small percentage of the sale price from the buyer known as “earnest money.” In exchange, instead of giving a deposit, the seller agrees to take the property off the market.
Until the final exchange has been completed and all conditions have been met, both the buyer’s deposit and the seller’s property are “in escrow.”
What is an Escrow Account and How Does it Work?
Escrow accounts are concerned more with the monthly mortgage payments than the initial purchase agreement. Whenever you are borrowing money from either a bank or a direct mortgage lender, you are given an escrow account. This escrow account is then used to deposit the part of your monthly mortgage payment. This payment will also cover taxes and insurance premiums.
The escrow account aims to reduce the risk that you will fall behind on your obligations to your insurance provider or the government by collecting a fraction of the annual costs each month.
The property taxes and homeowner’s insurance premiums that you have to pay annually, will be required to pay a monthly fraction towards each cost by your lender so that the balance can be accumulated in your escrow account. This balance will then ensure that your expenses are paid on time every year.
Having escrow accounts can be a requirement for borrowers set by mortgage lenders in order to minimize the risk that you might fall short of your homeowners financial obligations.
In case of a foreclosure, these unpaid taxes or insurance can make it harder for the mortgage lender to be able to recover the original loan. This is why mortgage lenders have a strong incentive to keep their borrowers on track by making escrow accounts a requirement so that all non-mortgage costs of owning a home are smoothed out.
Although mortgage escrow account rules allow lenders to pay your taxes and insurance premiums on your behalf, they can have some drawbacks.
You are often required by lenders to keep a minimum balance in your escrow account so that you can be protected against any unexpected cost increases. The usual rule requires a minimum of two months’ expenses although the limit can be higher if your mortgage is riskier.
Your escrow accounts are also reviewed once a year to make sure that the calculated payments in the account are keeping up with the expenses.
Should you Include Escrow in Mortgage?
Escrow plays a role in the initial home purchase and the monthly mortgage payments that follow the purchase. When you are making the purchase, certain guarantees are provided to the buyer and seller both by the escrow process. A neutral third party will receive the signed purchase agreement once the two parties have agreed on a sale. This neutral third party can be a bank, title company or attorney.
Escrow agents exist to monitor and help both the parties fulfill the conditions of the sale including the buyer’s “earnest money” deposit. This earnest money proves to the seller that the buyer intends to buy the property and has the ability to complete the purchase as well. However, if the buyer backs out or fails to uphold the terms of the contract, earnest money can be forfeited to the seller.
Escrow agents also have the responsibility of distributing money to the parties involved other than the buyer and seller. These payments are made as commissions to the real estate agent, prepaid mortgage interest to the lender, escrow agent’s own fee and recording fee paid to the county office of records.
So it can be seen that escrow helps greatly simplify the home buying experience. If you decide not to buy escrow, you would be held responsible for making accurate and timely payments to each and every party that is involved in the transaction. So to answer the question, yes, you should add escrow to your mortgage if you can afford it. It is always good to have a safety net to ensure that your payments and expenses have been taken care of on time so there is no need to worry about foreclosure, etc.
How can I Remove Escrow From my Mortgage?
How long you pay for escrow on your mortgage depends on when your mortgage payments are completed. The closing process for an escrow account can vary by state. However, no matter which state you are in, you will have to sign a ton of paperwork. You should take your time with signing this paperwork and read it through carefully so you are aware of everything it says. The seller will also sign the paperwork as well after which the escrow agent will prepare a new deed which will name you as the property’s owner and send it to the county recorder.
You will then have to submit either a cashier’s check or arrange a wire transfer in order to meet the remaining down payment and any closing costs you might have. Some of the down payment would have been covered by your earnest money.
Your lender will send you your loan funds to escrow so that the seller and if the seller’s lender needs to be paid, can be paid.
If you have made it this far, you would have paid the entire amount and be the new owner of the property. However, what can we do if you have not made it this far but want to remove escrow from your mortgage even before you are halfway there?
You can choose to cancel an existing escrow account. However, please be aware that every lender has different terms for cancelling the escrow account and your lender might not have the same terms your friend’s lender had. Which is why it is important to make sure you think your decision through carefully before going through with it.
In some cases, your loan might have to be at least one year old and have had no late payments. Another requirement for cancelling escrow might be that no tax payments or insurance premiums are due to be paid within the next 30 days.
If you have decided to remove an existing escrow from your mortgage, you should call your escrow agent to find out if you even qualify for a cancellation of the escrow account.
However, before you consider cancelling your escrow account or removing escrow from your mortgage, there are a few things you should consider.
Before you cancel it, think long and hard about whether you actually want to get rid of it or not. Some borrowers think it is convenient not to have one. Without an escrow account, there are fewer bills that you have to deal with. But even with an escrow account, there are fewer bills to worry about. It takes care of your expenses and makes sure that your taxes and insurance premiums are paid.
Having an escrow account is a good idea for people who are not otherwise good at saving money. An escrow account helps you save money by putting a small amount through each mortgage payment towards bills that would be due later.
If your lender ends up waiving or cancelling the escrow requirement, you would still have to provide evidence that you have paid the tax payments and insurance premiums which can be quite a hassle to do. However, if you do not pay your taxes or insurance premiums, your servicer can pay them for you which you will have to repay then otherwise your lender might foreclose.
When facing foreclosure, the best thing to do is contact a real estate attorney so you can find out what your options are and what your next move should be.
Now that we are clear on what is escrow on a mortgage and how important it is to include escrow in your mortgage, we can make an informed decision when buying a mortgage. Even if your lender does not have escrow as a requirement, it would make sense to buy one as it can help you out a lot.