Scott Storace - Branch Manager, 100 Pacifica Drive Ste. 140, Irvine CA 92618 NMLS #226339 949.973.0141

"From the minute you call me to the minute we close, I have your back. No hassles, no banker’s hours & quick response times." - Scott Storace

  • Home Loans up to $3,000,000
  • Interest Rate Float Down Option
 

Have Questions? Call 949.973.0141

Understanding Escrow Accounts

Escrow Accounts Divert Some of Your Payment into A Side Fund

Escrow Accounts Divert Some of Your Payment into A Side Fund

Orange County, CA – An escrow account is a very important asset for a lender, as it helps them ensure that homebuyers pay their property taxes and insurance premiums on time. Sometimes referred to as an ‘impound’ account, it essentially acts as a place for you to set aside money to pay certain annual expenses in a monthly fashion.

For example, your property taxes may cost $6000/year but it might be challenging for some people to pay the entire lump sum when it comes due. The lender will add an additional $500 to the monthly payment. Therefore it will total $6000 at the time that the property taxes come due. The lender will use these funds to pay the county assessor on your behalf, effectively turning an annoying annual bill into a relatively minor monthly one.

The same principle applies to homeowners insurance and private mortgage insurance as well.

The Lender’s Perspective

There’s a very simple reason that the lender wants you to have an escrow account: they don’t want you to lose the house, because you’ll probably stop paying the loan. If you don’t pay property taxes and the house is seized, or if you don’t pay homeowner’s insurance and your home is destroyed by a natural disaster you’re not likely to pay off your mortgage, even if you remain legally obligated to do so. By giving you a tool that makes paying those bills easier, the lender is reducing the chance that they don’t get their money back. Lenders entice borrowers to take this option by waiving the escrow fee. In California, these accounts are also required when your down payment is less than 10%.

Alternatives to Escrow Accounts

Because these accounts occupy otherwise-liquid assets not all homeowners want an escrow account. For that reason, lenders often offer an ‘escrow waiver’ which allows them to skip the impound account. As mentioned above, this waiver carries a fee and requires a down payment of 10% or more.

Escrow accounts are not for everyone. It’s a decision that is as individual as the person. Do you manage money well? Are you comfortable budgeting for large bills and making lump sum payments a few times each year? What about convenience? Weigh it all and see which you prefer.

Contact me for questions regarding escrow accounts.

Scott Storace

If you like this post please share it!

Comments are closed.