What is an escrow account? Every time we near the end of a homebuyer transaction, they inevitably ask us to explain this portion!
The most basic way to describe an escrow account is a house savings account. Kind of.
Taxes & Insurance
When you purchase a home, the mortgage lender has an escrow account set up for your home. Every month, a portion of your payment goes into this account. The amount put into the account is based on your monthly property taxes, homeowners insurance, and potentially even flood insurance costs. (Divide the total amount of your property taxes by 12. That’s the amount from your monthly payment to your escrow account to pay your tax bill.)
When the bill comes around for these items, your mortgage company takes the funds saved for these bills from your escrow account and makes the payment for you.
Noteworthy, when you close on your new home, the lender will collect a few months of property taxes and insurance on the front end to ensure enough money in your escrow account when the bill comes due. Every year, your mortgage servicer will do an escrow analysis to see if your mortgage note will need to be increased to cover these bills or if you have too much in the account and they need to refund you some of the money.
Flood insurance will only be escrowed if you’re in an A or AE flood zone. These flood zones require homebuyers to carry flood insurance in the New Orleans metro area.
Condo Dues & HOA Dues
Condo and HOA dues are not included in escrows. These are paid separately. Make sure you budget appropriately.
Can I avoid having my taxes and insurance put into an escrow account?
Yes, you can! However, you must use a conventional loan and put a minimum of 20% down on your mortgage. You should also note that a lender must be able to qualify you off the monthly note with taxes and insurance. So even if you pay this out of pocket annually, you must qualify for the loan with these numbers included.
A great local lender can walk you through all things regarding your escrow account. Our go-to mortgage woman is Courtlin Donner with NOLA Lending!
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