When you purchase a home, there are many other expenses involved with taking ownership than simply paying back your mortgage loan. Homeowner’s insurance and property taxes also need to be paid in addition to having to pay for routine maintenance of your home. An escrow account option provided by your mortgage lender will make the tasks of making these payments simpler. Before you agree to escrow terms, however, it is important for you to gain a better understanding of what an escrow account is and how it works.

In its most basic sense, an escrow account is an account that is handled by a one party in order to pay a third party. You pay an additional amount of money each month when you make your mortgage payment, when you have an escrow account through your mortgage lender. These additional funds are used to pay for your homeowner’s insurance as well as your property taxes, with your lender making the payments for you on your behalf.

Your lender will re-examine your escrow account every year or perhaps every six months, since the amount of your homeowner’s insurance and taxes are estimated. In case your escrow account falls short of having sufficient cash to cover your expenses, you may be given the option to pay the shortage upfront or your monthly payment may be increased in order to cover the expenses. On the other hand, you may receive a check for the additional amount, if you have additional funds in your account.

Having an escrow account can be quite advantageous to a homeowner though they can end up paying a bit more than required upfront,. Not having to worry about making certain your insurance and taxes are paid by a certain deadline is an example. Apart from giving you one less bill to worry about, you also don’t have to worry about getting hit by a large bill once every six months or so. Since the expense is spread out over several months and is included in your mortgage payment, they seem far more manageable.

Initially it may seem as if providing an escrow account service would be a major inconvenience for a lender, making you wonder why lenders would bother with setting up these accounts. Having an escrow account set up along with the loan is advantageous to the lender as well is a fact.

Do not forget that lenders have a vested interest in the property that you have purchased. If you default on the loan, the lender will need to try to resell the property in order to recoup the money it has lost. Similarly, the lender will experience a loss, if your home is damaged or if it is taken over by the city, state, or county, because you failed to pay your taxes. The lender is essentially protecting its investment by including your tax and homeowner’s insurance payments in the mortgage loan payment and by paying these expenses. For these reasons, you likely will not have an option regarding setting up an escrow account, as your lender will require it in order to make certain these expenses are getting paid.

Related posts:

1. Understanding What You Can Afford for a Home The time to decide how much you can afford to...
2. Understanding What You Can Pay for a Home Decide how much you can afford for a house before...
3. The Basics: Foreclosure and You The real estate business is witnessing a downturn; house foreclosure...
4. Understanding Closing Costs as a First Time Homebuyer Closing costs are very significant in any real estate deal....
5. Merchant Accounts – Accepting Payments Online Online payments are such a great convenience for any home-based...

This entry was posted on Tuesday, October 6th, 2009 at 1:55 pm and is filed under business finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.