Getting to know ESCROW
If you’re a current homeowner or in the process of buying a home, you’ve probably heard the word “escrow”. It’s one of those mortgage terms that gets used often but isn’t always clearly explained. So, let’s break it down.
What is Escrow?
At its core, escrow is a financial arrangement where a third party holds money on behalf of others to ensure certain obligations are met. In real estate, escrow shows up during the home purchase, and after closing as part of your monthly mortgage payment. Both serve different important purposes.
Escrow During the Home Purchase
When you make an offer on a home, you’ll typically submit earnest money, a good-faith deposit showing the seller you’re serious. That money doesn’t go directly to the seller. Instead, it’s held in an escrow account by a neutral third party (often a title or closing company). The funds stay there until all purchase conditions are satisfied, the transaction closes, or the contract is terminated.
Escrow After Closing
Once you become a homeowner, escrow takes on a different role. Most lenders require borrowers to maintain an escrow account to maintain property taxes, homeowners insurance, and sometimes flood insurance or HOA dues. Instead of paying all these large bills separately once or twice a year, you pay 1/12th of the annual amount each month as part of your mortgage payment.
Your total monthly payment is often referred to as PITI (Principal, Interest, Taxes, Insurance). Your lender then pays your tax and insurance bills on your behalf when they come due.
Why Do Lenders Use Escrow?
It’s simple: protection. If property taxes or insurance go unpaid, it can create serious issues such as tax liens or uninsured damage, which put both the homeowner and the lender at risk. Escrow ensures taxes are paid on time, insurance coverage stays active, and that large annual bills don’t catch homeowners off guard. For many homeowners, it also makes budgeting easier.
Why Does My Escrow Payment Change?
A common question we hear is: “Why did my monthly payment increase if my interest rate is fixed?”. In many cases, the answer is escrow adjustments. Your lender performs an annual escrow analysis to compare what was collected, what was actually paid, and what’s expected for the upcoming year.
If property taxes increase (which they almost always do) or insurance premiums rise (which they almost always do), your monthly escrow portion may go up. If there’s a shortage in the account, you can either pay the shortage as a lump sum or spread it out over the next 12 months.
The key thing to remember is that a change in payment doesn’t necessarily mean your loan terms changed. It’s often tied to taxes and insurance.
Can I Waive Escrow?
In some cases, yes. Borrowers with strong credit, lower loan-to-value ratios and conventional loans may have the option to waive escrow and pay taxes and insurance directly. However, depending on your lender, there may be fees involved and many homeowners choose to keep the escrow because it simplifies their budgeting and removes the risk of missing payments.
Overall, escrow may seem slightly complicated at first, but it’s an important piece of the homeownership puzzle to understand.
If you ever have questions about your escrow account, payment changes, or how it works, a Summit Mortgage Loan Officer would be happy to help. We believe informed homeowners make confident decisions, and we’re always here to walk you through the details.
Tags: ascent app, contingency offer, credit score, down payment assistance, down payment options, First-time homebuyer, mortgage basics, Mortgage Education
Categories: First Time Homebuyer, Home Buying, Homebuyer strategies, Mortgage Basics, Second Time Homebuyer
