You shouldn't be surprised if you have a lot of questions when buying a house for the first time. Most first-time homebuyers do simply because the process of getting a loan and buying a house can be overwhelming. One thing you might wonder about is an escrow account. You may wonder what this is, why it's used, and what the benefits are for you, and here are some of the answers you might be looking for.
What is an escrow account?
Escrow accounts are commonly used with mortgage loans, and they are used as a way of saving money for two expenses homeowners have — property taxes and homeowner's insurance. If you set up an escrow account when you get a mortgage loan, your lender will estimate how much these two expenses will be for the entire year. The lender will then divide the total by 12 months to determine how much these expenses will cost monthly. The lender will then add this amount to your mortgage payment each month, and you will have to pay the total of your normal monthly mortgage payment and the monthly escrow account payment.
When your property taxes and insurance payments are due, you will do nothing. The lender will take the money from your escrow account and will pay the bills for you.
Why do lenders require this?
Lenders often require this as a way of protecting themselves. By making borrowers use escrow accounts, the lenders can be certain these expenses will be paid, and this is important because of the consequences that can occur when these bills are not paid. If a homeowner doesn't pay his or her home insurance and experiences a fire that destroys the house, the lender may end up losing all the money this person borrowed. If the homeowner fails to pay his or her property taxes, the state may place a lien on the property, and this too can create problems for the lender.
What are the benefits you will receive from this?
There are two main benefits you have by setting up an escrow account, and the first is the convenience it offers. You will never have to worry about paying these two expenses, because your lender will make sure the payments are made. Secondly, using an escrow account makes budgeting easier. It's always easier to divide an annual bill into 12 monthly payments than to come up with the entire amount all at once.
Escrow accounts are often required by lenders; however, you can still opt to have one even if your lender doesn't require it. If you are looking at homes for sale, talk to a real estate agent. Your agent can help you find homes you might like and can help you understand other topics related to the home-buying process.
