Principal and interest, taxes and insurance, closing costs and pre-paids. These are common terms used when discussing mortgages. Once you understand all the parts and pieces that make up your monthly payment, wrapping your mind around it becomes fairly easy.
The goal of this article is to help you better understand what the term “escrow” means in simple terms so you can comfortably navigate this part of your payment.
By Wikipedia definition, escrow is explained as:
• an arrangement made under contractual provisions between transacting parties, whereby an independent trusted third party receives and disburses money and/or documents for the transacting parties, with the timing of such disbursement by the third party dependent on the fulfillment of contractually-agreed conditions by the transacting parties, or
• an account established by a broker, under the provisions of license law, for the purpose of holding funds on behalf of the broker’s principal or some other person until the consummation or termination of a transaction; or,
• a trust account held in the borrower’s name to pay obligations such as property taxes and insurance premiums.
In simpler terms, your escrow account is your “savings account” that is used to pay your future bills. Your lender collects a small amount each month (included in your payment amount) and puts it aside so you have money to pay annual bills like taxes and insurance.
Lenders and homeowners alike have found that it is easier to have a consistent, predictable payment amount over a 12-month period that allows the property owner’s tax and insurance obligations to be paid on their behalf, preventing an unexpected payment due.
Sometimes consumers confuse “closing costs” with their escrows, also known as “pre-paids” or “pre-paid items”. Closing costs are the costs associated with the loan. These can include both costs from the lender providing the mortgage and/or government required fees.
Your escrow account is different, in that it is not a cost associated with the closing of the loan, but instead is a savings account set up to pay your future bills.
Looking to lower your payment? Look at your escrows. You have the right to shop around for insurance costs. The lower the policy, the less the lender collects from you monthly, which in turn can lower your monthly payment. Many insurance companies will automatically renew your payment, giving you the convenience of not needing to call around but if you have the time, it can pay to shop around.
As you pay your mortgage down, it may be possible to remove the escrow requirement. This will give you the lowest payment possible but shifts the obligation to you personally to pay the tax and insurance obligations.
Simple right? Do you have a mortgage question? We are here to assist. Send us your question and we are happy to help get you answers.
About Adams Homes
Founded in 1991 by Wayne Adams, Adams Homes started serving homebuyers in Pensacola, Florida. Throughout the 1990’s and early 2000’s, Adams Homes grew its business into markets throughout Florida, Alabama, and Mississippi. Since 2005, Adams Homes has expanded into markets in North Carolina, South Carolina, Georgia, and Tennessee with corporate headquarters located in Gulf Breeze, Florida.
As one of the largest privately-held new home builders, Adams Homes has built more than 35,000 new homes since its inception in 1991. Adams Homes caters to first-time buyers, move-up buyers and empty nesters in more than 100 communities. With a portfolio of home designs featuring both concrete block/stucco exteriors as well as all brick homes, Adams Homes has a selection available for nearly every budget.
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