September 5th, 2019 2:57 PM by Davis Love
Yes. At least, we're pretty sure it is.
According to Merriam-Webster.com, escrow means “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.”
The truth is, other than a strange word and a complex definition, escrow accounts as they apply to mortgages are pretty simple.
I mentioned escrow accounts in my last post, “How Much Does it Cost to Get a Mortgage?” I said that, basically your escrow account is a separate account from your mortgage that your lender uses to pay your homeowner’s insurance, mortgage insurance and property taxes.
What it means is this: when you get a mortgage, you have to pay four things - principal, interest, taxes and insurance (PITI). The principal and interest are what make up your actual mortgage. If you have a $200,000 loan, over the life of the loan you will pay $200,000 in principal, plus a calculated amount of interest based on, of course, your interest rate.
Your taxes and insurance, on the other hand, can be “escrowed.” As Merriam-Webster would tell you, that means they are held in trust (kept) by a third party (your lender) to be turned over to the grantee (the government and the insurance companies) only upon fulfillment of a condition (when they are due).
So, our dictionary friends of course aren’t wrong. The reason you have an “escrow account” separate from your mortgage is that your taxes and insurance aren’t owed to your lender, but rather to the government and to an insurance company. But, your lender uses the escrow account to collect that money on a monthly basis and hold it for those third parties to pay them when its due. This means that you just one big payment every month, and your lender/mortgage servicer can deal with making sure all the right people get their money at the right time.
When you close on your loan, you’re going to have to fund your escrow account. That’s because the lender wants to have some money in that account in the beginning to make sure they don’t get stuck with a bill with none of your money to pay it. That’s why you will see on your closing documents that you have an “initial escrow payment” that is significantly larger than your monrthly escrow payment will be.
Note that you aren’t always required to have an escrow account. Most lenders will require them at the beginning of the mortgage, for a certain amount of time, and until the loan reaches a certain loan to value (usually 80%). After that, you might be free to make the taxes and insurance payments directly.
Since we're talking about definitions, it's important to realize that "escrow" is used in a lot of different contexts in the financial and legal world. But, you don't need to worry about that when you're trying to figure out how to pay your mortgage.
At the end of the day, at least for purposes of a home loan, whether you refer to an escrow account, money that is escrowed, or your escrows, it’s simply a fancy old word used to decsribe the account that holds money you owe for taxes and insurance. You will make an initial deposit into that account when you close on your loan, and then you’ll make monthly payments into the account, which your lender will use to pay the government and insurance company.
Davis Love (864) 814-0710Davis@pathwaymortgage.org NMLS# 1866217