If you’re a homeowner or looking to buy a home soon, you may have heard the term “escrow”. Technically, escrow refers to a legal arrangement wherein one party temporarily holds a sum of money until certain terms can be met, at which point they will distribute it as agreed.
In terms of real estate transactions and home ownership, an escrow account is typically used in two ways. Firstly, an escrow account can be opened by a home-buyer and used to hold their deposit or other money related to the sale. This demonstrates that the buyer is serious and has the necessary funds, while also protecting the buyer by ensuring that their money is not handed over to the seller before all terms and conditions of the sale have been met.
The second way an escrow account can be used is to support homeowners on paying for taxes and insurance. Your lender will often set up an escrow account for you and divert a portion of your monthly mortgage payments to this account, where it will be saved, accumulated during the year, and used to cover the tax and insurance fees on your home when they are due.
Why have an escrow account? There are many benefits to escrow, for homeowners and lenders. The biggest benefit is that an escrow account helps homeowners to budget for their property tax and insurance payments by making smaller monthly deposits – rather than needing to suddenly come up with a lump sum when annual bills are due. The escrow system helps to ensure that all taxes and insurance payments on your home are received on time.
Another advantage to the escrow system is that as a homeowner, you don’t need to keep track of all the different due dates for your tax bills and home insurance bills. With the mortgage servicer looking after the funds in escrow, you can be sure that everything will be paid in full and by the deadline, which means no worries about late payments.
At the same time, having an escrow account isn’t entirely hands-off. It’s still important to play an active role in your homeowner finances and to keep track of where all your monthly mortgage payment money is going.
When you start looking at your escrow payments, you might notice that payment amounts tend to fluctuate from year to year. The reason for this may be due to property taxes, which are not the same every year; hence escrow payments are adjusted based on these changing scenarios. Alternatively, your escrow payments can also fluctuate if you have an adjustable rate mortgage – and therefore, your escrow account will need to accommodate for any scheduled changes to your mortgage’s principal and interest during that year.
All the specific changes, calculations and requirements around escrow payments are intended to make sure that no matter what happens, you always have enough money in your account to pay for the taxes and insurance on your home. If you have any questions about fluctuations, you should feel free to get in touch with your lender to learn more.
It’s unlikely that you would ever have a shortage or deficiency on your escrow account, for the reasons listed above. However, if you do find yourself in this situation, your lender can assist you to pay up the deficiency or, in rare cases, get a waiver on your escrow account. A waiver request must be reviewed; and if approved, the escrow account will be closed and the homeowner will be responsible for paying all due taxes going forward. It’s important to note that not all loans are eligible for an escrow waiver, such as loans that have private mortgage insurance.
It’s also possible to have a surplus in your escrow account, meaning more money has been accumulated than is needed to pay off your property taxes and insurance for that year. In that case, you will receive a check for the surplus; with HUECU for example, any surplus over $50 will be disbursed back to the borrower.
Ultimately, the escrow system is a straightforward way to protect both you and your lender from any possible negative consequences related to non-payments on home taxes and insurance. For more information about what escrow means for you and your home buying journey, visit https://huecu.org/escrow-analysis/. You can also contact HUECU at 617-495-4460 or by email at HUECU_Mortgage@harvard.edu to answer any questions you may have regarding your escrow account.