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What Is Escrow In A Mortgage?


What Is An Escrow Account?

If you choose to have your mortgage lender pay your taxes and insurance for you, they will set up an escrow account (also called an Impound) to store funds and release them at the right time and to right party. The lender will collect a 12th of the total annual amount of taxes and insurance due on each payment.

Why Do I Have To Put Money In Escrow At Closing?

The money put into escrow, depending on the amount of annual taxes and insurance, can often be as much or more than the closing cost on a typical mortgage. There are several reasons why so much money must be put in a new escrow account. Homeowner’s Insurance is paid a year in advance so at close you will pay the full yearly premium for your policy. Taxes are typically due twice a year in six month payments. Depending on when you close, you may have to pay the seller back for taxes they have already paid in advance and put enough in an escrow account to make sure a full six months is in the account at the time it is due.

Why Do I Have To Put Extra Money In The Escrow?

There are several reasons for the overage in the initial escrow account. Lenders can put a small “cushion” in the account in case next year the taxes and insurance go up. This is typically one month of taxes and one to two months of insurance. There will also be an extra month of insurance and taxes because in the first year you will typically only make 11 payments. They need the extra month to get the full 12 months.

Escrow is one of the more confusing parts of the mortgage process. My team is here to help walk you through the process.

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