An escrow account, also known as an impound account, is a financial arrangement in which a third party holds and manages funds on behalf of two parties involved in a transaction. In the case of a home loan, the lender will typically require the borrower to establish an escrow account to ensure that property taxes and homeowners insurance are paid on time.
Here's how it works: when you make your monthly mortgage payment, a portion of that payment goes towards paying off the principal and interest on your loan, while the remaining amount is deposited into your escrow account. When your property taxes and homeowners insurance bills come due, the funds in your escrow account are used to pay these bills on your behalf.
The advantage of having an escrow account is that it helps you budget for these recurring expenses, rather than having to come up with a large lump sum payment all at once. It also provides a safety net in case you forget to make a payment, as the funds will already be set aside.
So how much should you expect to pay into your escrow account each month? The amount will depend on your Idaho property taxes and homeowners insurance premiums. When you first close on your home loan, your lender will estimate these costs and set up your escrow account accordingly. However, these estimates may change over time as your property taxes and insurance premiums fluctuate.
Each year, your lender will review your escrow account and adjust your monthly payment as needed to ensure that you have enough funds to cover your property taxes and insurance. If your property taxes or insurance premiums increase, your monthly payment will also increase to reflect these changes.
It's important to note that while your lender is responsible for managing your escrow account, you are ultimately responsible for ensuring that your property taxes and insurance premiums are paid on time. If there is a shortfall in your escrow account, you may be required to make up the difference.
In some cases, borrowers may choose to waive the escrow account requirement and pay their property taxes and insurance premiums directly. However, this option might require a higher down payment and a higher credit score, as lenders view it as a higher risk. But 1st Choice Mortgage does have lenders that will allow for an escrow waiver with out higher donw payments.
Now that you understand the basics of an escrow account, let's talk about how it can affect your home loan. When you apply for a mortgage, your lender will take into account the cost of your property taxes and homeowners insurance in calculating your debt-to-income ratio (DTI). This is the percentage of your monthly income that goes towards paying off your debts, including your mortgage.
By including your property taxes and insurance premiums in your escrow account, your lender can ensure that these costs are factored into your DTI, which may affect your ability to qualify for a loan. However, if you choose to pay these costs directly, they will not be factored into your DTI.
In addition, having an escrow account may affect the amount of money you need to bring to closing. Because you will need to prepay several months' worth of property taxes and insurance premiums at closing, your escrow account balance will need to be sufficient to cover these costs.
In summary, an escrow account is a financial arrangement in which a third party holds and manages funds on behalf of two parties involved in a transaction. It is a requirement for most home loans and is used to ensure that property taxes and homeowners insurance are paid on time. While it can provide a safety net and help you budget for recurring expenses, it can also affect your ability to qualify for a loan and may require a higher down payment. If you have any questions about escrow accounts