Escrow 101

We’ve all heard the word Escrow being thrown around. And I’m sure we’ve all heard the running joke that no one knows what it is! Well that’s why we’re here. Let’s get to the bottom of what Escrow is and how it affects you.

What is Escrow?

An Escrow account is an account you pay money into and then your lender uses to pay your property taxes. Escrow accounts can make it easier on the buyer because then you’re only paying one bill, you’re mortgage bill, but it’s a bit more expensive because part of that is going into Escrow. However, then you don’t have to worry about paying your property taxes and insurance.

How is my Escrow payment determined?

As you may know, your property taxes and insurance premiums may change every year. That means your Escrow account is also changing. Escrow payments are typically reassessed each year and are changed based on the previous year’s payments. Because these payments are always changing, most places requires two extra months’ payments just in case. If, at the time of payments, you don’t have enough in your Escrow account, you’ll need to cover the difference.

One thing to note: Escrow accounts do not cover typical expenses that come with owning a home (like utility bills) or HOA fees.

Do I need an Escrow account?

Short answer: it depends. Some mortgage lenders and some specific loans require buyers to have an Escrow account.

If you do not choose to have an Escrow account, you will have lower monthly mortgage payments. However, you will also need to put money aside for property taxes and insurance and make those payments.

What are the advantages of having an Escrow account?

The main benefit is not having to think about saving extra money. You also don’t have to worry about paying property taxes or insurance payments on time because someone else is taking care of it for you.

It’s also beneficial to have one set payment each month, which can save you from surprises come tax time.

What are the disadvantages of an Escrow account?

One major disadvantage is that your mortgage payments will be much higher. They will also change each year, so it’s difficult to plan finances well in advance.

Another issue is that with taxes and insurance changing so much, your Escrow lender may incorrectly estimate how much is needed and you could still owe a lump sum.

The last disadvantage is that there’s a middleman involved in your tax and insurance payments. Some people prefer to be in complete control of their finances rather than relying on a third party.

Our final thoughts?

Escrow accounts can seem confusing, but they aren’t all that complicated. They are a great option for some people, and maybe not the best option for others. That choice is personal. If you aren’t sure which option is best for you, give us a call! We’d be happy to help. And, if you’ve decided you’d prefer to control your finances and want to get rid of your Escrow account with DECU, we can help with that, too (depending on the loan type). Reach out – we love to chat!