Welcome to Tami Hayes Real Estate FAQ Blog. There are so many different elements to home buying, selling, maintenance, etc. I guarantee you, I don't know the answer to all your questions but know where to find it and hopefully right here is the place.
What is escrow and why? Or, Why not?
An Escrow Account MAY be set up as a convenience by your lender, at closing, to pay certain bills, bills in which the lender has a vested interest. These would be property taxes and insurance. They collect one full year of homeowners insurance and an additional 3-4 months. This is "seed money" to start the saving process for the following year's premium. The amount of taxes collected differs from state to state and the time of year of the purchase. When these bill's come due, your lender will pay them on your behalf. The amount of taxes and insurance are divided by 12 and added to your monthly payment.
Again, the lender MAY set up an escrow account for you. Along with PMI, 20% equity is the magic number in which most lenders do not require an escrow account. If you are financing the purchase of a home and are not putting more than 20% down on the home, the "MAY" becomes a "WILL".
Many people choose to continue to escrow even after even after they have gained more than 20% equity in their home. It is basically "pay it and forget about it". You do not have to come up with a homeowners policy premium one time per year nor pay property taxes when they come due. Your lender will pay this from your escrow account. There are pros and cons to both.
Pro's
- Pay it and forget about it.
- If for some reason you are unable to pay your homeowners insurance, your lender will buy on your behalf, which is quite costly.
- If for some reason you are unable to pay your property taxes, No Surprise, the country will put a lien on your home which can be difficult to get released.
Con's
- If you choose to NOT have your lender set up an escrow account they usually add a one time charge of 1/4 point to your closing costs. This should be listed as additional points line item but is sometimes hard to spot. On a $750K home this is $1875.
- Maintaining the discipline to save that money on your own.
- Loss of any interest you may gain on that savings throughout the year
In conclusion, unless you feel like you can generate interest or dividends over the course of the first year of home ownership, have them set up the account. If you have any questions, please feel free to contact me or your lender.
Tami Hayes
913-579-1951
PS. If you REALLY don't want to pay and REALLY don't want to escrow. Let the set up the account and after your first payment request your escrow account be terminated.
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