What Is an Escrow Account? Property Taxes & Insurance Explained

Transcript

Lightly edited from the video for readability.

Hi. I'm Matt Demorest, the owner of HomeSure Lending. What is an escrow account? Let's talk about it. We get a lot of questions from people.

What's an escrow account and why do I have to have 1? Well, most loans with less than 10 percent down, you have to have it. And what is an escrow account? Really simply, it's a forced savings account for your taxes and insurance. You have to have it with less than 10 percent down, and that money is set aside as part of your monthly mortgage payment.

So every month, you're going to pay 0.083 of your yearly tax and insurance. So we're going to use an illustration to help this make sense, and we're going to use 1 of my favorite foods, pizza. Pizza comes in a lot of different varieties, a lot of different sizes, but we're going to use a 12 slice pizza today to make this make sense. So 12 slices of pizza. Why 12?

Well, each month, 1 of our 12 months of the year, you're going to make an escrow payment as part of your mortgage payment. Let's say your taxes are 2400 dollars for the year. That equals 200 dollars a month. And let's say your insurance is 600 dollars per year. That equals 50 dollars a month.

So you have 250 dollars each month as part of your mortgage payment that's going to go into your escrow account. We get this question all the time. If I'm paying 250 dollars a month as part of my monthly mortgage payment, why do I have to deposit money into my escrow account at closing? And that's a really good question. So the goal of the escrow account is to have enough money at the end of the year to pay your tax and insurance bills.

So let's just assume the tax bill is due 12 months from now. Well, when you close on your mortgage, you're really not making your 1st payment for 2 months. So if you think about it this way, if we have a payment due 12 months from now, we're going to need to end up with 12 pieces of pizza. So there's going to need to be 2 months worth of that tax in the escrow account before you make those next 10 payments after that. So you have a full pizza 12 months from now.

Because you got 2 months you're not making the payment, so those 2 need to go into escrow at closing, so the next 10 payments you make, when that bill's due, you got a full pizza and you're ready to pay it. The same thing is true with your insurance. Every year your escrow account will get analyzed and looked at to make sure that you're not paying too much or too little. When you buy a house, there are things that can happen. You know, the house can go up in value.

The city can add taxes. So your taxes can change yearly. Your mortgage portion of your payment will never and can never change. Your principal and interest payment will remain the same on a 30 year fixed mortgage unless you have an adjustable mortgage. But on a fixed rate mortgage, that part can't change.

We get asked, why did my payment go up this year? Well, it's usually because your insurance went up and you shop for insurance, I would call your insurance agent if that's the case. It can also be because your tax went up. Your house is worth more, the value of your house has gone up, which is a good thing, but the mortgage payment is not changing. People often ask us, well, my payment changed, what can I do?

If rates have gone down, we can look to refinance and lower the mortgage portion, but there's not anything we can do about the taxes and insurance. You can fight your taxes with the municipality if you think your taxes have gone up too much, but they only usually do that once a year in March. If your taxes do go up, the place you call is the servicer. That's the 800 number at the top of your bill. We can't help with those issues, but we can help guide you.

So if you have questions, feel free to contact us and we'll help walk you through maybe what you say or how to get your tax bill. Really, payments going up is something that you should expect and that's why we try not to pre qualify people right at their maximum and help them buy a house that they can afford these little changes every year. It's really important to us as a company that we help you purchase with confidence and refinance with ease and a big part of that is understanding your escrow account.