What You Should Know About Escrow Accounts
Today, let’s talk about some of the advantages and disadvantages of escrow and impound accounts. Here’s what you need to know.
An escrow, otherwise known as an impound account, actually relates to who is in charge of paying for the property taxes on a home, as well as the homeowners insurance. So will you pay those yourself, or will the lender pay them on your behalf and include those fees in your monthly payment?
Let’s say that you choose the second option where the lender pays those fees on your behalf—that’s done through what’s called an escrow account, aka an impound account. In this example, the lender will craft and design a separate account to live alongside your mortgage. It’s sole focus is to manage the tax payments and insurance renewal premiums so that it’s a little bit easier for you to make your payments.
Wouldn’t it be easier if you could just make one monthly payment and budget that every month? With an escrow account, you won’t have to budget in order to come up with those payments twice a year, which can be difficult for a lot of people.
There’s a great benefit to crafting an escrow impound account right up front. In fact, if you put down more than a 5% down payment, you’ll likely be able to choose whether or not to get an escrow account. However, for those putting down less than 10%, your lender may require one so that they can ensure those payments are made on time.
On the other hand, a disadvantage to taking on an escrow impound account is that it happens at the closing table. For example, if it were February right now and you and I were to close on a home, your first mortgage payment wouldn’t be due until April 1. How much money would you have in that account to be able to make that payment? Well, you’d have nothing, which is why the lender will then require us to pre-fuel that account with money up front (you may know this money by a different name: closing costs).
This is just one of the options that we’ll visit about directly when you and I speak about your next home purchase—I can’t wait to discover if you and I believe that an impound escrow account is something we’ll want to set up, or if it’s something that we can manage on our own. For any questions you have in the meantime, don’t hesitate to reach out to me. I have a funny feeling that this is our year.