Escrow Payments Explained
By Jim Olenbush on June 25, 2009
It is the opinion of most people that the amount of the loan they take out in order to purchase the home determines their house payment. The amount that you and the mortgage lender agreed upon will be reflected in your monthly house payment. Nonetheless, there are other costs that will likely be included in the payment you make each month.These additional costs are part of what is referred to as your escrow payment.
Putting Expenses in Escrow
Your payment, apart from your monthly payment toward your mortgage loan, will also include expenses that are included in escrow. Other items included in escrow are your house insurance as well as your property tax amount. If you are required to carry Private Mortgage Insurance, which is referred to as PMI for short, this will also be included in your escrow.
Your house insurance protects your property and your belongings. The property taxes, though, are the taxes you need to pay on home each year. It is in the best interest of the mortgage lender to include these costs in the monthly house payment because your home can be taken from you if you fail to pay your property taxes. If you do not have house insurance in place and your home is destroyed, your mortgage lender may not be able to recover its investment if you do not have house insurance in place. It goes without saying that, having these costs included in escrow is beneficial to you as well because you only have to make one regular payment rather than three.
What are the Drawbacks to Using Escrow Payments?
Though most homeowners find escrow payments convenient, this payment method has its own potential drawbacks. For example, the amount of your property taxes and your homeowner’s insurance for the next year are estimated by the mortgage lender based upon past costs as well as other factors that may impact the costs. Your monthly payment is than adjusted to reflect these estimates, or you may be provided with the option to send the difference to your lender at one time.
In either case, you will be experiencing an unexpected additional expense. Of course, you most probably would have faced this added expenditure anyway, unless the mortgage lender was severely off base with its estimates. If you pay more than required for these expenses throughout the year, you can get a check reimbursing you for the overpayment at the end of the year.
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