What Is an Escrow Account And How Does It Work?
Design by Diana Walton- Houston First Time Home Buyer Specialist
Hello and welcome to Houston First Time Home Buyers Edition, formally First Home Houston (FHH), where we provide useful information to help Houston first time home buyers make the most informed decision when it comes to buying, decorating, and maintaining their first home.
An escrow account is an account that is set up by your mortgage lender to collect, hold and pay your taxes and home owners insurance when they become due. The purpose of the account is to ensure these items are paid on time.
Not everyone that purchase a home will have an escrow account. However it is a requirement for certain type of loans. For example, FHA loans require all borrowers to have an escrow account, while conventional loans borrowers will need to have 20% down payment or more to avoid an escrow account and VA loans require 10% down and strong credit to opt out of having an escrow account.
The account is managed by your mortgage servicer, which can also be the mortgage lender. The mortgage servicer/lender not only manages your escrow account, but will manage your mortgage until it is paid off. Do keep in mind that your mortgage servicer can change. Lenders can and will sell the servicing rights to your loan.
The way your escrow account work, is, each month, your mortgage servicer takes the property tax and home owners insurance portion from your mortgage payment and place it into your escrow account. The money is then used to pay the property taxes and home owner insurance when they become due. This is usually once a year.
Because property taxes and insurance amount will change yearly, your mortgage loan servicer will review your account one a year to make sure they are collecting enough money to pay both expenses.
If they are not collecting enough, you will be notified and given an option to pay the shortage by way of a one-time payment or by increasing your monthly mortgage payment to make up for the shortage. However, if they collected too much money, you will receive an escrow refund. If at anytime you have questions about your escrow account, you can always call your mortgage service.
As always, thank you so much for stopping by. Remember, if you are thinking of purchasing your first home, please contact us. We are here to help. We have been helping Houston first time home buyers since 2011 and we can help you. I hope you have an amazing day. Until next time...Diana
