Escrow Guide: What Is Estimated Escrow?
July 26th, 2022
Buying a house with little to no previous knowledge about the process means going through piles of paperwork and unknown terms, always in fear of making a mistake. Worry not! We are here to help you with all unanswered questions, such as - what is estimated escrow and how you pay it.
When you get your loan estimate, check the part about your projected monthly payments. There, you will find how much you are potentially going to pay if you get approved for that same amount. Except for the interest and the loan principal, the loan estimate will include important homeowning costs, like taxes and insurance installments - which get paid through an escrow account.
All Parts of a Monthly Mortgage Payment
Once you’re paying for a monthly mortgage payment, you might feel as if it is larger than you expected when calculating principal and interest. That’s most likely because you are paying money that goes into your escrow account.
Your monthly installment payment covers much more than just principal payback. Here is a visual of an average monthly payment.
Mortgage Escrow Account
An escrow account is an essential part of owning a home, especially if you plan to sell it later on. This type of account is usually managed by your mortgage service provider, and it serves to collect monthly installment payments for taxes, insurance, and other homeowning costs.
Each month as you pay your mortgage, you are adding money to an account that exists only to help you pay your homeowning costs in time. It helps you because you don’t need to pay a lump payment. And it helps your lender, as they usually feel the consequences of your unpaid liabilities.
Homeowner's and Mortgage Insurance
If you are buying a home without a down payment, you might want to check out an FHA loan. This type of loan requires no money down and allows you to pay off the balance over 30 years. Mortgage insurance is covered under escrow.
However, there is one catch – you must buy mortgage insurance throughout the entire term of the loan. You can choose to waive the monthly premium, but it won't cover the whole amount. If you don't make payments on time, the lender could foreclose on your property.
On the other hand, any homeowner, no matter the loan they took, needs to have home insurance or homeowner’s insurance. Those policies protect the property from numerous mishappenings, such as theft, natural disasters, and other damages.
Home insurance protects you, your property, and the lender who invested the money into it. That is why it is included in the escrow account.
Property Taxes
The cost of buying a house varies widely depending on where you live. Some areas are expensive; others are cheap. But one thing doesn't change: taxes and other government fees.
They're part of the total cost of ownership. Each state and the local government impose a property tax, which is around 1.1% of the average home value. Some states are famous for having very low property taxes - Alabama, Colorado, and Hawaii.
Property taxes are paid once or twice a year, but if you pay them via escrow - you pay a small sum each month. When the taxes are due, your escrow holder is legally obliged to pay them on your behalf and send you the escrow disbursement.
Who Are Mortgage Servicers?
People usually mix mortgage lenders and service providers, even though the two have entirely different roles in your lending experience. Even though the lender loaned you the money, when the deal is closed, you will interact more with the servicer, as they handle your mortgage statements and escrow account.
Your mortgage servicer is also the one you talk to about changes in your loan. If you want to make sure you know what to ask them, here are some questions to consider:
- How long have they been servicing my loans?
- What types of loans do they specialize in?
- Are there any servicer fees?
- Do I need to purchase homeowners' insurance through them?
- Is it possible to switch lenders without switching servicers?
- Can I change my address without changing my servicer?
What is Estimated Escrow?
When you sign a contract to purchase a home, the seller typically provides a document called an "escrow agreement," which outlines the terms of the sale. In most cases, the buyer pays the seller up front, and the seller transfers ownership once the buyer makes the final payment.
In return, the seller receives money from the buyer, known as the "down payment," plus a portion of the remaining balance due.
The Purpose of Monthly Escrow Payments
Having an escrow account protects your interests during the entire buying process. You won't pay for things you didn't agree to buy, which helps protect your credit score.
Escrow accounts are used by real estate agents, lawyers, lenders, and even homeowners themselves. They're typically managed by a third party called an escrow holder. Your lender sets up the escrow account, and you'll use it throughout the transaction.
A good escrow agent will make sure everything goes smoothly. He or she will review the contract, check out the property, and ensure that both parties are happy with what's being agreed upon. If there are any issues, they will work with you to resolve them.
An escrow account is beneficial because it allows you to focus on the important stuff — finding the perfect house — while someone else takes care of the small stuff.
How to Find the Best Escrow Account Holder?
The best escrow holder is the one that has the three Rs - reliability, responsibility, and respect. You need a servicer who will keep the books tidy and your escrow funds untouched unless they are due.
What you need is an experienced hand in the real estate jungle, and for that, you need to contact Lightspeed Escrow. We are real estate experts that decided to take matters into our own hands and create an environment where escrows are not a nuisance or a hold-back but rather a helpful tool for any real estate transaction.
As you know, escrows are useful in many real estate transactions, and we can offer our services for all of them - from refinancing to buying and from homeowning to home selling.