Helpful Mortgage And Real Estate Advice

What Is An Escrow Account? Do I Need One?

By on November 11, 2013 in Home Buying Advice, Mortgage Videos

An Escrow Account is a savings account that helps homeowners pay additional expenses such as property taxes and insurance. Learn how it can simplify expenses. An escrow account is also called an impound account. The escrow account will hold any money that has to be paid out for insurance and tax purposes, allowing you to have a clear idea of how you will pay these expenses. Without escrow accounts, new homeowners can become confused and forgetful about their tax and insurance responsibilities. The last thing you want is to fall behind on insurance premiums, or forget to pay your local home taxes.

Importance of Escrow Account

Instead of having to come up with your yearly hazard insurance and tax payments within a short space of time, an escrow account allows you to put money away every month for those purposes. For example, if you have hazard insurance costs of $1200 a year, coupled with taxes of $2400 a year, you will need to have $3600 in the account at the end of every year. This can be achieved by adding $300 a month to the escrow account. Adding the amount every month ensures that you keep on top of any impending payments.

Many new homeowners forget to do this, and the consequences can be very severe in certain cases. For example, if someone forgot to pay their hazard insurance and ran into a fire in their house, their insurance may not cover the expenses and repair costs. This would not only cause problems for you, but for the lender from whom you took out a mortgage. After all, your entire house is collateral for the mortgage that you are paying. If the house burns down and your insurance does not cover your losses, you will have a mortgage problem as well.

Escrow Bill

At the end of every year, you will get an escrow bill from your lender. This bill will let you know what your detailed charges were in relation to insurance and taxes. If you paid too much escrow over that period, the extra amount will be added forward into next year. If you paid too little, you have the option of paying the entire difference, or spreading the amount over the next 12 months.

Paying Taxes/Insurance Yourself

One alternative to getting an escrow account is to pay these taxes and insurance costs yourself. This is a viable alternative, however is requires a great deal of discipline. Most people prefer to open an escrow account, and they let their lender deal with the specifics.

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About the Author

About the Author: Jessica Lucas is the managing editor for Mortgage Home Base, a top real estate finance blog dedicated to helping borrowers and home buyers understand the home loan process. Follow Jessica on Google +, and share your comments here. .
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