Many people wonder what an escrow account is, so what is it?
What is an escrow account? When you’re buying a new home, you’ll set up an escrow account, which will be the account in which your taxes and insurance are paid annually when they come due. So rather than you making a mortgage payment, and then once a year paying your insurance or taxes, you make one mortgage payment and a portion of that payment is diverted to the escrow account. Then, a balance builds up throughout the year. When the taxes and insurance are due, we pay that money out of the escrow account on your behalf.
Now, when you’re closing on your new home, there are things we need to take into consideration to properly fund the escrow account.
The first thing that will be included in your escrow is called prepaid interest. If you close in the middle of a month on your new home, we prepay the interest at settlement to the end of that month, then you’ll skip the payment the following month. So, no payment the next month, and you start with your regular schedule payment the month after. We have to account for that 15 or 20 days prepaid interest.
Also, your homeowner’s insurance agent, like Allstate or Farmer’s is going to want to be prepaid for the first 12 months. They always want to be paid before they issue the insurance policy, so we have to prepay that 12 months insurance.
We’re going to collect for that at closing, and then we’re going to put three months worth of taxes, and three months worth of insurance into the escrow account to get it started with a balance. That way as you move forward throughout the years ahead, if there’s an increase in the taxes, or increase in your homeowner’s insurance, there’s a little bit of a cushion in that escrow account in which those can be paid without increasing your monthly payment.
We hope you found this interesting and we would love to help you out with any questions you may have. Please reach out to us or fill out your free consultation today!