If you’re taking out a mortgage to buy a home, you may be wondering what an escrow is and how it works. Here’s what you need to know about mortgage escrows.
What is a Mortgage Escrow?
An escrow account is a financial account held by a neutral third party on behalf of two parties engaged in a transaction. The third-party manages the funds in the account until the transaction is complete or a contract is fulfilled.
An escrow account is a type of account that is used to hold funds until a predetermined event occurs. This event could be the sale of a property, the completion of a project, or the inspection of a purchased item. Once the event occurs, the funds in the escrow account are released to the appropriate party.
When Do You Need an Escrow Account?
You can generally set up an escrow account with a lender when you take out a mortgage or refinance your home loan. You can also ask your lender to add an escrow account to your existing mortgage.If you’re getting a mortgage or refinance through the FHA, VA, or another government-backed program, you’re required to have an escrow account. Fannie Mae and Freddie Mac require escrow accounts as well on loans over 80% loan-to-value.
Some lenders may require escrow accounts on all their loans, while others will only require them on loans where they’re required.
Types of Escrow Accounts
There are three types of escrow accounts:
Mortgage Escrow Accounts
Mortgage escrow accounts are mandatory on most government-backed loans, including the FHA and VA mortgages. They’re also common on conventional loans.
The funds in this account are used to pay your escrow items, which include your homeowners insurance and property taxes.
Homeowners Insurance Escrow Accounts
Homeowners insurance escrow accounts are common on loans where the lender requires escrow accounts. They’re also common when the loan is being sold to Fannie Mae or Freddie Mac.
The funds in this account are used to pay your homeowners insurance premium.
Tax Escrow Accounts
Tax escrow accounts are common on loans where the lender requires escrow accounts. They’re also common when the loan is being sold to Fannie Mae or Freddie Mac.
The funds in this account are used to pay your property taxes. They may also be used to pay any fees associated with your property taxes.
Who Can Manage Escrow Accounts?
A mortgage lender may choose to manage your escrow account. The lender may also hire a third-party service provider to manage the account on their behalf.
You can also choose to manage your own escrow account. This is most common in situations where the property owner has paid off the mortgage.
Can I Get a Refund on My Escrow Account?
The funds in an escrow account are not the property of the mortgage holder. The funds are held in the account until they are needed to pay property taxes or fees.
If the account has a balance at the end of the year, the mortgage lender may send you a refund. The refund may be sent to you as a check or applied to your mortgage balance.
If you have a surplus in your escrow account, you can also choose to have the funds applied to your mortgage balance.
Mortgage escrows are a way for lenders to protect themselves from borrowers who may default on their loan payments. Escrow accounts are set up so that a portion of each mortgage payment is put into the account each month. This money is then used to pay the borrower’s property taxes and insurance premiums when they come due.
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