How Escrows Work- Taxes and Insurance
As part of owning a home, you will be required to pay property taxes and carry a hazard insurance policy. The property taxes are paid to the city or county you live in (sometimes both). The hazard insurance is paid to the company that protects you against losses for fire or weather related issues. Both of these can be paid monthly as part of your mortgage payment. If you have less than 20% equity or any type of government backed mortgage (FHA, VA or USDA), escrow for these items is mandatory.
What this means?
As stated above, a portion (1/12 to be exact) of these amounts can be paid monthly as part of your monthly payment. If tax and insurance escrow is present on your loan, the total amount projected to be due is divided by 12 and collected monthly as part of your payment. This portion is then held in an escrow account on your behalf to be paid in the future when the bill is due. Typically, homeowners insurance is paid annually and taxes are paid bi-annually. This way, you don’t have to come up with a lump sum amount each time you receive an invoice from the county or insurance company to pay these items.
Other effects of Escrow-
If you choose to have taxes and insurance as part of your monthly payment, you should also be prepared for changes in your monthly payment amount each year. This is due to the fact that the cost of insurance premiums and the amount of property taxes are subject to change year to year. For example, if your neighborhood were to suffer a few seasons of hail storms or a measure is passed to increase your mil levy, your insurance or taxes may increase. Due to these changes, your mortgage servicer (the company you make the monthly mortgage payments to) will conduct an annual escrow analysis. At this time, your escrow account will be audited for overages or shortages due to these possible changes. You will then be notified of any changes to your payment and options to handle any overage, shortage, and/or deficiency. Since you will still receive annual premium notices from your insurance company and tax notices from the county, it is recommended that you review these documents when you receive them to avoid any surprise in your monthly payment change when your mortgage servicer conducts the annual escrow analysis.