Your Mortgage Professional should wear many hats. Sure we’re here to secure you financing for your home purchase - that’s our job, and one we do happily. But a good Loan Officer also tries to educate their clients, empowering them through knowledge. Mortgages are complex animals, and it is the responsibility of any LO to make sure that information is not only delivered, but understood.
To that end, Midwest Lending will feature The Language of the Loan blog series. Here we’ll try and take certain words and concepts that are key to the mortgage industry, and break them down into layman’s terms. Don’t know a ‘buydown’ from a ‘basis point’? No problem, we’ll explain. You won’t even have to bring us an apple after class…
Let's Take a Look at: Escrow
The legal definition: Something of value, such as a deed, stock, money, or written instrument, that is put into the custody of a third person by its owner, a grantor, an obligor, or a promisor, to be retained until the occurrence of a contingency or performance of a condition.
Put more simply, think of escrow as a holding account for all of the money involved in your real estate transaction. Your lender will set up the account on your behalf, and collect monthly payments for property taxes, PMI, homeowners insurance, and other fees that apply to your particular loan situation. Then when payments come due, they distribute the funds to the homeowner's county assessor, insurance company, etc.
At the end of the year, your lender will add up the escrow payments into and out of the account, like balancing a checkbook. If your taxes went up and you didn’t increase your monthly mortgage payment, you may find yourself with a shortfall at the end of the year, which you’d need to pay separately to your lender. If you’ve overpaid escrow at the end of the year, your lender may cut you a check, retain the amount for future expenses, or even allow the overage to be applied to your loan principal.
CAN you waive escrow?
Yes, many lenders will allow you to waive escrow, meaning you agree to take on the responsibility of paying amounts that would otherwise be paid via your lender through the escrow account. You would pay taxes directly to your city, town, or taxing entity. Same with your homeowners insurance – you could decide to pay your premium for the year in one lump sum, rather than monthly through your lender’s escrow account.
SHOULD you waive escrow?
Honestly, it’s a personal decision. If you like to know exactly what you need to pay each month, and don’t want the headache of worrying about late or missed payments, then using escrow is probably the way to go. But maybe you get a hefty bonus at the end of the year, and would rather use that to pay your property taxes and insurance and pay less each month for your mortgage? Then waiving escrow might work more in your favor. Just keep in mind that most lenders will provide a mortgage rate discount (usually 0.125%) for choosing to use escrow.
Call Midwest Lending today - we'll put you in touch with a real person, who also just happens to be a home financing expert!