Let's cover a sexy topic today...your escrow account. For folks new to home buying, an escrow account is a fund that the mortgage lender keeps to pay your insurance and taxes when they are due. The money for the fund comes from monthly mortgage payments as 1/12th of the buyer's taxes and insurance costs are added to the payment every month and deposited into the escrow account to be used as the bills come due. Each year the accounts are adjusted up or down depending on changes in the taxes and home owner's insurance. If your mortgage loan has monthly mortgage insurance due to the fact that less than 20% is contributed in dwon payment funds that monthly amount will also be added to the payment and be placed in the escrow account to be paid out as mortgage insurance premiums come due.
But wait, you say. I am perfectly capable of paying my own taxes and insurance without the lender holding my money hostage until the time those bills are due. If you are putting 20% down you will be able to waive having an escrow account. In some cases with some lenders you can do that if you put 10% down. However, an escrow account is the way that most people end up paying their taxes and insurance.
Having an escrow account is not good or bad. The good part is that when those bills are due the debts are paid and there is no big bill that you weren't anticipating that comes in at an inopportune time. But you also don't have access to the money.
But why do lenders even bother with the escrow account? Why does it matter? To answer that question we have to take a look at who has invested in your home. You may have put 5% or 10% down on your home when you made your purchase. How much did your lender contribute? A couple of dollars more would be a safe guess. What is important to the lender is that those two bills are paid on time. Lenders don't want the insurance to lapse because it is their lien they are protecting. If your home burns down, the lender wants to be paid back. As for property taxes, if they aren't paid, property taxes are one of the few liens that can move into first position to be paid over a lender's lien on title. The lender is protecting their interest in the property by requiring the escrow account.
By Federal Law an escrow account can't contain more than a three months cushion for upcoming bills. Because Indiana pays taxes a year in arrears, if a buyer buys a home that is new construction, the taxes that will be paid in the first year the homeowner owns the property are on the lot or land only. (Remember, the year before the house was built there was only ground-so that is what is taxed.) This is a significantly smaller amount than once it is assessed with the home on the land. If the lender only escrows the taxes for the land, when the full taxes hit including the house, the escrow account will be not be able to cover the tax bill and the home owner will notified that they have to make up the shortfall in the escrow account. To prevent this, lenders often add an estimated tax payment rather than the payment for just the land so there won't be a huge financial shock to the borrower when the full tax bill comes due. But because of the Federal Regulation regarding how much the lender can keep in the escrow account, often the escrow account exceeds its limits before the higher tax bill comes due. The excess money has to be refunded to the home owner-which if he/she is wise-they put away for the day when the property taxes are fully assessed because the escrow account won't have enough money to pay the taxes. Eventually the round robin of tax money is balanced out-but it is an interesting road getting there.
If you decide to refinance your home, a new escrow account will be established with your new lender. (The possible exception may be that if you refinance with the same lender your escrow account might transfer to the new loan, however with the servicing of so many loans being sold, the chances of your loan being with the same lender are probably not high.) About three weeks after you close on your new loan the contents of your current escrow account will be refunded to you. This is the same if you sell your home and purchase a new one. The payoff of the old loan is the trigger that results in the escrow refund.
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