Mortgage escrow accounts and what you need to knowMortgage, Real Estate, Tax | December 8, 2010 at 5:50 am
In essence, Escrow is a term that is used by businesses to define a transaction where buyers and sellers cannot make a direct exchange of money or goods or services and neither wants to take the risk of non-delivery later. These trust issues are solved by a third party, known as the Escrow, who releases what is entitled to the party in question once they have fulfilled their part of the bargain. This Escrow can also come into play as real estate escrow accounts. In this, the buyer gives the money to the escrow and the seller gives the rights to the escrow as well and neither gets what they are entitled to unless the escrow gets both the funds and the title in question. Similarly, it can come into play as mortgage escrow accounts.
Mortgage escrow accounts are not the same as a real estate escrow since a homeowner and a mortgage lender are the parties in question. As part of his end of the bargain, a homeowner must pay property tax and insurance on time. Failing to do so affects the mortgage lender since such actions can destroy the value of the collateral that the homeowner has placed the lender. In order to have a better valuation of the collateral in the case of a default, the mortgage lender will look to get guarantees about full and timely payment for property taxes and home insurance, which is where mortgage escrow accounts come into play.
The mechanisms of mortgage escrow accounts are very simple. In order to pay property taxes and home insurance, it is the homeowners responsibility to deposit the funds with the escrow account as part of the mortgage deal. When the payments become due, the escrow releases the funds and pays it off in time, thus leaving the value of the home intact. The benefits of this to the homeowner and to the mortgage lender is quite clear. The mortgage lender gets a sense of security and assurance about the value of the collateral while for the homeowner, this is a way to automate the payments he has to make for one part of the mortgage by paying smaller sums of money instead of a lump sum payment. It’s a win win situation for all. The lender knows that there will be no shortage of funds that hurts him and the homeowner doesn’t have to remember any due dates for payments. The one thing that homeowners must keep in mind with mortgage escrow accounts however are how it will affect their monthly budget. That is the one critical aspect many homeowners overlook almost totally.