As you are going through the mortgage process, you will come across the term escrow a lot. Escrow is fairly simple. Escrow covers your property taxes and insurance. Generally speaking all mortgages are escrowed whether you are looking at a fixed rate loan or an in house adjustable rate loan. The main benefit of escrow to the bank is that they know the loan collateral has current insurance and the property taxes are paid. The benefit to the consumer is you don’t have to come up with potentially thousands of dollars at the end of the year.
When banks figure up escrow they will either have you get an insurance quote, get a copy of your current policy if you are refinancing, or estimate the insurance if you don’t have a quote or policy. They will also get a copy of the property taxes if you are building or refinancing an existing structure, or use an estimate if you are building new construction. Lenders will add the property taxes and insurance together, divide by 12 and add a 2 month buffer. The buffer ensures that you are covered in the event your taxes or insurance goes up. When you close on your loan lenders will collect the 1st years escrow as part of the closing costs. This ensures you are always paying your escrow ahead for the current year and are up to date.
Should you escrow?
As mentioned above you generally do not have a choice. Occasionally on in house adjustable loans you may have the option to waive escrow. Not all lenders will allow you to though. In most cases I wouldn’t recommend this, because that means you are on the hook for the full insurance premium and tax bill at the end of the year. Allowing the bank to do escrow will generally take a lot of pressure off your finances, plus it doesn’t cost you anything!
Thanks for sharing!