How Taxes and Insurance Tie into Your Mortgage Payments

Have you ever wondered why taxes and insurance are tied into your mortgage payment? Or have you heard the term “escrow account” and questioned what exactly that was? Escrow accounts are required for many homebuyers, especially those with low down payments, or 80% or greater Loan to Value.

What are Escrow Accounts?

Escrow accounts are kind of a funny thing if you’re not familiar with them. Basically, they’re a savings account that a portion of your monthly payment is deposited into in order to pay your property taxes and homeowner’s insurance when they come due.

How Do They Work?

So, for illustration and easy math, let’s say that your property taxes are $1,200/year ($100/month) and your homeowner’s insurance is $600/year ($50/month). Let’s also assume that your first payment is on January 1st, and taxes and insurance both come due on January 1st of the following year.

At closing (when you move in), you will owe the "premium," or full amount, for your first year’s homeowner’s insurance policy. This can either be collected and paid at closing, or the insurance company can just send a bill to your house, it's your decision as the buyer.

The previous owner is responsible for the taxes that are owed before you move in. Then, every month, you will pay $100 (one twelfth of your annual taxes) and $50 (one twelfth of your insurance premium) into an escrow account. Then, one year later, you will have “saved” enough money ($1,200 and $600) to pay both your property taxes and your homeowner’s insurance.

Benefits of Escrow Accounts

Having an escrow account saves you from having to make a large payment annually or semi-annually, breaking it into monthly payments that are more manageable.

Another benefit of having an escrow account is that the mortgage company servicing your loan sends the money to pay your taxes and insurance for you, so you never have to remember to do it.

Conclusion

If all of this talk of escrowing money has you in the mood to buy a home, you can apply online today.