Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Escrow on a Mortgage
This word escrow gets used a lot throughout a purchase, sale, or even in investment transactions and it can be used in a few different ways.
In this post, we are going to focus on the idea of an escrow account and we will also get some context as to when that will be used and why.
What Is An Escrow Account?
An escrow account is a bank account that holds funds is sort of a neutral third party type situation.
In the state of Texas, most escrow accounts are managed through the title companies in residential transactions.
1st Scenario For Escrow Account (Sales Contract)
This account is where money like earnest money deposit would be held. The money that is being held between a buyer and a seller. Those funds are used as dictated by the term of the contract which could contain multiple scenarios.
There could be hundreds and thousands of scenarios, however, what matters is for you to understand that funds can be protected in a transaction between two parties.
Most of the realtors make sure that the transaction between the buyer and the seller is not confrontational. However, there could always be some skepticism or lack of trust for an individual to write a check to an unknown person.
Those funds can sit in an escrow account and be held by a neutral third party who is simply tasked with making sure that the terms of the agreement are acted upon and those funds go to the right place when those things happen.
2nd Scenario For Escrow Account (Mortgage Payments)
As a potential buyer, seller, or investor if you are trying to know about the escrow account the other most common time an escrow account is used is when you pay more than your principal and interest on your mortgage payment.
This is very different from the buy or sale process.
This is for the buyers who have already purchased a home and have started making payments for a mortgage.
Most mortgage payments include principal and interest which is the amount that you owe on the loan and the interest you are paying on the loan.
And it is entirely common that you would also pay property taxes and/or homeowners insurance every month in your payment.
In this, the taxes and insurance piece of your monthly payment are only paid once per year when they are due but you pay them every month and they build up in an account called an escrow account.
This escrow account is managed by the lender or bank that is servicing your mortgage. You pay principal and interest every month that goes towards your loan.
You pay taxes and insurance that is accumulated in an escrow account for up to 12 months and your lender or bank will pay the full insurance and property taxes for the year.
Should You Escrow Your Mortgage Payment?
Most of the time you have to put 20% down to waive the escrows. The reason for that is it’s a little bit riskier to waive the escrow because now you are responsible to make those tax payments and the insurance payment.
So when those bills come due, you have to pay them otherwise you risk penalties of not paying taxes and insurance.
If you are escrowing, it becomes easy for you. You don’t have to worry about paying a hefty amount for the entire year for your taxes and insurance.
What is an Escrow shortage?
When you have an escrow account set up for your taxes and insurance with your lender or bank, you make a monthly payment for them for an estimated taxes and insurance for a year.
But what if the taxes in your county are increased or your insurance premium increased in a specific year.
Usually, the lender overestimates the escrow payments so that the account does not fall short of the taxes and insurance when they are due.
However, there are many cases where the county assesses and increases the property taxes and it could be possible that the amount in the escrow account may not be enough to cover those.
This is called escrow shortage. You would receive a letter or intimation from your lender to make sure that there is no escrow shortage in your escrow account.
Conclusion
So this is a gist of how escrow payments work.
It really is just taking these bills that are due on an annual basis and prorating them into monthly amounts, setting them into accounts so that you always have the money when the bill is due.
