Often you will hear the term “escrow account” when applying for a mortgage. Often the criteria for whether or not an account is required is tied to the percentage of down payment made for the mortgage.
What is an escrow account?
Your lender will add on an amount to your monthly mortgage payment which flows to this account, and is a set-aside for property tax and insurance. If you live in an area covered by a Homeowner’s Association, on occasion, the monthly dues or maintenance fee payments can be added to the escrow account.
Advantages to Having an Escrow Account:
1) No Sticker Shock
If your property taxes are due annually or semi-annually, these payments can be large and sometimes inconvenient to your family budget. Having the payments amortized over the course of the year enables you to make the payments over the twelve months, and the payments are smaller.
2) Easier to Budget
Depending on what your escrow account covers, taxes, insurance, HOA dues, or more, making one payment monthly to your mortgage holder for these payments eliminates the need to write multiple checks monthly, is easier to budget for, and requires less discipline.
One of the potential “downsides” is the fact that your property tax obligations may vary from year to year, as rate increases are made by your local government, or your property value is re-assessed in value. This will cause variations in your mortgage payments from year to year, however, the upsides in budgeting and smaller monthly payments for taxes and fees far exceed the downside.
How Can You Get an Escrow Account?
If you are not offered or required to have an escrow account with your mortgage, and it seems to offer advantages that you would like, your lender will most likely be happy to set one up for you.
