Purchasing a home is a big moment in your financial journey, especially if you’re buying for the first time. It’s a good idea to go into the homebuying process with as much information as possible to help you feel more comfortable and at ease with the whole process. For example, you should know about some of the financial terms that tend to impact a purchase decision, including “escrow.” What is an escrow account, and how does it help you pay some of the essential expenses associated with your new house?
What is an escrow?
Some of the expenses associated with paying off a home loan take the form of annual payments rather than monthly installments. These charges come from sources such as taxes from the state and local government, or insurance costs associated with your loans. While the billing cycles for taxes and insurance aren’t monthly, it’s easier to set aside a small amount of money each month to make the payments. This is what escrow accounts are for.
Escrows are set up by your mortgage lender, and they convert your manageable monthly contributions into payments of the larger bills from the government and insurance companies, without any action on your behalf. Having escrows in place is standard, and are sometimes required by law.
Escrows are designed to protect you, the homeowner, to ensure large payments don’t take you by surprise. Homeownership can and should be based on manageable and predictable payments each month, and using escrow accounts allows you to handle insurance payments and tax obligations in the same way as your standard monthly mortgage payments. The CFPB notes that even when escrow isn’t required in your area, it often makes sense to use this option for all relevant payments.
What does waiving escrows mean?
Some mortgages allow you as the homeowner to waive your escrows. This means you won’t set aside money monthly and will pay the tax and insurance bills all at once, as they come up. Since this option is not a standard practice today, it comes with a few conditions. First of all, you should check that your home loan allows you to waive escrows. Second, you should see whether there will be additional costs at closing associated with not using escrow. Third, you should make sure your personal finances support the payments needed to cover taxes and insurance charges.
Are you ready for a mortgage?
Now that you’ve learned about the escrow process, you’re one step closer to making an educated and confident decision about signing a new loan. You can check out our mortgage glossary to bolster your understanding of other unfamiliar terms you come across during negotiations – or simply ask your First Centennial Mortgage loan officer. When you have all the answers you’re looking for, the homebuying process can be rendered painless.
If you’re early in the home search process, getting a pre-approval from First Centennial Mortgage can help you ease the final steps of securing your loan and securing the house of your dreams. When you’ve been approved, you can inspire confidence in sellers that you’ll be able to meet your financial obligations, while gaining clarity about how much house you can afford. It’s never too soon to start looking at your pre-approval options with your loan officer.