What is an escrow account? How does setting one up benefit you when buying a home?
Escrow accounts are required when purchasing with any of the government loan programs (FHA, VA, and USDA. An escrow account collects taxes and insurance into your monthly mortgage payment and pays those bills out when they become due).
For conventional loans, an escrow account is required if you put less than 20% down. However, if you are putting down 20% or more, setting up an escrow account is optional.
Money is put into an escrow account at closing. The amount paid at this point will provide a little cushion in case taxes or insurance rise in the next year. And once you’ve made this initial payment, the monthly cost going forward will be half of that.
In Lake County our taxes are due November 1 of every year. When we set up escrow accounts, we set aside enough money to pay off the taxes in November as well as the homeowners insurance when it is due.
As the borrower, you are not paying interest on the funds that are being put into escrow. The only interest payments you make go toward your principal and interest. There is not an increase in the interest you pay over the life of the loan from setting up the escrow account; it is more of a convenience for you to make sure that your taxes and insurance are paid on time each year. It is one less thing to worry about.
If you have any questions about setting up an escrow account, please feel free to call me. I look forward to speaking with you soon.