What is an escrow account and what does it mean to have one?
An escrow account (sometimes referred to as an “impound account”), is like a savings account attached to your mortgage, in which part of your monthly payment goes toward certain items. These items typically include your property taxes, hazard insurance, and flood insurance.
There are a couple of instances when an escrow account is required. The first is if you’re using any kind of government loan program (FHA, VA, and USDA) to buy a house. It’s also required for conventional loans if you put less than 20% down. Ultimately, the county can put liens on the home, so the lender is simply ensuring their lien position.
The thing to remember about escrow accounts is that you’re paying 1/12th of the actual property tax/hazard insurance/flood insurance bill as part of your monthly payment. Some people assume they’re paying interest on their escrow account, but that’s not the case. That monthly amount is set aside until those payments are due.
Here in Florida, for example, property tax bills are sent out in November, and if your lender pays them in November, you get a 4% discount. Your insurance bill is usually due the month you purchased your home because insurance policies are usually written on a yearly basis.
As always, if you have questions about this or any mortgage topic, don’t hesitate to reach out to us. We’d love to help you.