The Ins and Outs of Mortgage Escrow

Mortgage escrow accounts can be beneficial to homebuyers.

But there are a few things homebuyers should know about them.

First, mortgage escrow accounts are like savings accounts for homeowners.

Money deposited in them is used by a lender to pay your property tax or insurance bill when it is due.

With an escrow account, your lender will pay the bill from the money it collects from you each month.

In turn, you should never pay a bill for these items as long as you own your home and have the escrow account in place.

Borrowers of conventional mortgages, as in those insured by Fannie Mae and Freddie Mac, are typically required to have escrows held back with the payment while the loan balance is greater than 80% of the value of the property.

Federal Housing Administration borrowers will – almost without exception – have escrows taken out of their mortgage payment.

Lenders take a risk when they allow you to pay your own taxes and insurance.

If you default on your mortgage payment, you are also defaulting on the money that goes into the mortgage escrow account.

Property taxes collected at closing will vary from state to state.

Some states collect taxes in arrears, meaning that taxes for 2010 will be due sometime in 2011.

In other states, taxes are paid in advance of the time period they cover.

The time of year a closing takes place may make a difference as to how much you may need at the closing table, as some taxing bodies have installments due in different parts of the year.

It is best for homebuyers to check with a tax professional for details in their area.