Should i escrow mortgage

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A mortgage escrow account is an integral part of the financial picture for most homebuyers. Some homebuyers are required by their mortgage lender to have an escrow account; others may opt-in to one through their mortgage servicer. Having your mortgage lender or servicer hold your property tax and homeowners insurance payments in escrow ensures that those bills are paid on time, automatically.

In turn, you avoid penalties such as late fees or potential liens against your home. Your homeowners insurance premiums and property tax assessments can fluctuate over time. For example, if your escrow account happens to be short due to your property tax bill increasing, your servicer will typically cover the difference temporarily.

To make up for it, your servicer will eventually increase your monthly mortgage payment. Depending on your mortgage lender, you may be able to get a discount on your interest rate or closing costs just by having an escrow account. Your mortgage lender or servicer is allowed to collect the amount of your homeowners insurance and property tax payments, plus a cushion, month in and month out, in escrow. Likewise, the money that could end up as an overage in an escrow account could be used for short-term investments.

Earning interest on such investments may make more financial sense for you, instead of allowing a bank or lender to reap the gains. Digital tools and attractive CD rates can help you invest your money outside of escrow and earn a better return for the long term, notes Henry Yoshida, CFP, founder and CEO of Rocket Dollar, a platform based in Austin, Texas, that enables users to invest funds from tax-advantaged retirement accounts.

Once you have an escrow account with your lender or servicer, it can be difficult to remove later if you change your mind. The large sums parked in an escrow account make it an attractive target for fraudsters.

Some sophisticated scammers even set up fake phone lines in an attempt to build trust. Under these false pretenses, fraudsters might try to persuade you to wire them money. The amount that needs to be tucked away in your escrow account hinges on your insurance premiums and property taxes, which can vary year to year. Depending on the type of loan you have, you might not have the option to forgo an escrow account. Escrow eliminates payment shock.

When the tax bill comes, it can be quite large. When you escrow, your payments are broken down into a monthly payment. You never see the big hit. Escrow is a convenience factor. As a borrower you no longer have to worry about writing the check for your tax bill or insurance bill. The lender does that for you. Obviously, you should always confirm that those payments have been made.

Escrow is another set of eyes. Your payments can and will change with every tax or insurance increase or decrease. Your lender automatically analyzes tax and insurance fees once per year to ascertain a escrow shortage or overage.

No fees or interest for escrow. Many people are under the impression that the escrow account is an interest bearing account. Notably, you cannot negotiate any seller concessions here if the contract says you will purchase the property "as is. You'll repeat this step after any other inspections. If the lender does not require a pest inspection, you may still want to get one to ensure the house does not have termites, carpenter ants, or other pests such as roaches or rats.

These problems may not be apparent during the daytime hours when you've most likely viewed the house and would be a terribly unwelcome discovery after you move in. If there are any pest problems, they will need to be rectified before the sale can proceed—assuming that you want to continue with the purchase.

This is another area where you may want to renegotiate with the seller to pay for the work. It is sometimes recommended to get an environmental inspection to check for toxins in the home such as mold, radon gas, and asbestos.

There can also be problems on the home site, like contamination from a location near a landfill, former oil field, dry cleaner, or gas station. Any problems uncovered in this area can mean serious health hazards and may be prohibitively expensive to fix. Many areas require flood reports. If the home is too likely to flood, you won't be able to get homeowner's insurance, which means you can't get a mortgage. In some cases, purchasing flood insurance in addition to your homeowner's insurance will solve this problem.

In rural areas, a land survey should be done to verify the boundaries of the property—in urban areas, the boundaries tend to already be very clear. This includes homeowner's insurance and any extra coverage required in your geographic area such as flood insurance. You will be required to have homeowner's insurance until your mortgage is paid off—and you'd probably want it, anyway.

Choose your own insurance company, which may be different than the one the lender selects, and shop around to get the best rate. These are also required by your lender, but again, you'd want them anyway. The title report makes sure the title to the property is clear—that is, that there are no liens on the property and no one else but the seller has a claim to any part of it.

Title insurance protects you and the lender from any legal challenges that could arise later if something didn't show up during the title search. If there is anything wrong with the title—known as a cloud or defect—the seller will need to fix it so the sale can proceed or let you walk away. Depending on where you live, the escrow company and the title company may be one and the same. It's a good idea to re-inspect the property just before closing to make sure no new damage has occurred and that the seller has left you items specified in the purchase agreement such as appliances or fixtures.

At this point in the process, you probably won't be able to back out unless the home has sustained serious damage. However, it's not unheard of for a petty buyer to pressure his or her agent to get the agreement nullified over something insignificant. At least one day before closing, you will receive a HUD-1 form or the final statement of loan terms and closing costs.

Compare it to the good faith estimate you signed earlier. The two documents should be very similar. Look for unnecessary, unexpected or excessive fees as well as outright mistakes. The closing process varies somewhat by state, but basically, you'll need to sign a ton of paperwork, which you should take your time with and read carefully. The seller will have papers to sign as well.

After all the papers are signed, the escrow officer will prepare a new deed naming you as the property's owner and send it to the county recorder. You'll submit a cashier's check or arrange a wire transfer to meet the remaining down payment—some of which is covered by your earnest money—and closing costs, and your lender will wire your loan funds to escrow so the seller and, if applicable, the seller's lender, can be paid.

If you make it this far, you'll finally get to take possession of the home. With traditional mortgages, your experience with escrow usually ends at this point. If you are buying a house with a Federal Housing Administration FHA loan, however, your dealings with escrow accounts continue in a different way, for different reasons. FHA loans require an escrow account be maintained for property taxes, homeowner's insurance, and mortgage insurance premiums MIPs.

Rather than paying taxes directly to the government and insurance premiums to the insurer, an FHA borrower pays one-twelfth of these expenses each month, in addition to his mortgage principal and interest payment, into the account. The escrow account holds this money until the bills become due at the end of the year. At this point, monthly escrow payments for the following year are adjusted up or down based on whether there was a shortage or surplus in the account for the current year's payment.

Mortgage-holders are obligated to send you an annual statement regarding the activity of your escrow account, which may also be referred to as a mortgage impound account.

Why all this? Because, to put it crudely, FHA loan applicants are considered higher risk: They often have lower credit scores, smaller incomes, and fewer assets—all the reasons they are seeking FHA loans, which have less stringent requirements for borrowers than conventional mortgages. But it wants to ensure the bills get paid, hence, the escrow-account mandate.

Your real estate agent will oversee this entire escrow process, so don't be too concerned if you don't understand every detail.