One of the big terms in the mortgage world is escrow. An escrow account is set up to collect funds to pay your property taxes, homeowner’s insurance and, if applicable, mortgage insurance. The lender collects one twelfth of each of those yearly premiums each month to ensure there is enough money in the escrow account when payments come up. In Minnesota, property taxes are due in May and October, while your homeowner’s insurance is due in full on the anniversary of your original closing date. But should you include that into your monthly payment with your lender?
In many cases, you won’t have the option of waiving escrow. If you are putting less than 20 percent down on a home, escrow will more than likely be required. Here are some questions to consider as they pertain to escrow:
Will it impact my interest rate?
The simple answer is no, at least not at SouthPoint. Your decision on escrow has no impact at all on your interest rate. You also don’t pay interest on the escrowed items because interest only accrues on the principal balance of the loan.
Do I do a good job of setting aside funds?
If you decide to waive escrow, you will need to pay the premiums on your own when they come up. This means you’ll have three decent-sized payments throughout the year that you need to plan for. If you escrow those funds with your lender, you won’t have to worry about scrambling for funds when those payments are due.
Is there a cost to set up the escrow account?
There is not an additional cost versus planning on your own. A lender will collect funds at closing to set up the account, and the amount collected will depend on how soon taxes/insurance are due. Typically a lender will collect about 2-3 months of taxes/insurance up front to ensure the escrow account is never negative. This is subject to change if there are any tax or insurance premium changes. This is why there is an annual review done, which leads me to the next question.
Can my escrow payment change?
Yes, and it will most likely change on an annual basis. Lenders are required to run an escrow analysis annually. At this time, you’ll see how close last year’s projections were for the past 12 months, as well as the projections for the upcoming 12 months. This will take into account any changes in premiums for the upcoming year as well as any shortages in the prior year’s projections.
Is it my responsibility to make sure the premiums get paid?
If you have set up your taxes and insurance in an escrow account with your lender, the answer is no! Your monthly payment includes the amounts needed for the lender to get those paid for you as they come up. If a payment is not made on time, your lender would be responsible to take care of the fees since you’re setting aside funds with them to ensure the bills are paid.
While there may be more questions, this should give you some good information to consider when deciding whether an escrow account is a good fit for you. Feel free to reach out to us with any further questions!