Owning a home involves a great deal of financial responsibility. In addition to monthly mortgage payments, homeowners are responsible for property taxes and other expenses. Paying these bills can require homeowners to come up with $8,000, $10,000 or more than $12,000 a year, depending on where they live. So the question is: Do you trust yourself to save up the money to make these payments on your own? Or would you rather have your mortgage lender collect the money to pay for your insurance and tax bills each month and then make the payments on your behalf?
It is common for mortgage lenders to set up escrow accounts for borrowers to put money to pay for property taxes and homeowner’s insurance. Under an escrow arrangement, you will send in extra money with each of your monthly mortgage payments, which your lender will deposit into an escrow account. When your property taxes or insurance bills are due, your lender will use this money to pay them on your behalf. By using an escrow account, your only duty is to make the monthly payments and your lender will handle the rest.
Escrow Account Basics
Escrow refers to a third-party service that is part of every home purchase. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be in escrow.
Mortgage lenders require borrower escrow accounts in order to minimize the risk that you fall short of your financial obligations as a homeowner. In a foreclosure, unpaid taxes or insurance can result in liens that make it harder for the mortgage lender to recover the original loan. This creates a strong incentive for lenders to keep their borrowers on track with escrow accounts that smooth out the non-mortgage costs of owning a home.
How is My Escrow Account Related to My Property Taxes?
An escrow account (or an impound account), is a special account that holds the money owed for expenses like mortgage insurance premiums and property taxes. When tax bills are issued by the tax assessor’s office, usually between mid-October and early November, your mortgage company will use the funds in your escrow account to pay the bill. If the amount of the tax bill is greater than what is in the escrow account, your lender will come to you for an additional payment to make up the difference. If the tax bill is lower than what is in the account, your lender would owe you a refund or a credit towards the following year’s tax bill.
When a reduction in taxes is achieved through a property tax protest, the tax bill that is sent to your lender will reflect the lower amount. In other words, your mortgage company will be paying fewer taxes on your behalf as a result of the protest. This directly affects the amount of the shortage you need to cover through an additional payment or the amount of the refund or credit that is due to you. Finally, every mortgage company treats this situation in their own unique way, so it is best to contact your lender to help guide you through the remainder of the process.
Property Tax Payments
Escrow accounts are set up to collect property tax and homeowners insurance payments each month. When your insurance or property tax bill comes due, the lender uses the escrow funds to pay them. That way, you do not have to keep up with the payment deadlines and you’re not forced to shell out hundreds or thousands of dollars all at once to cover your taxes or keep your insurance current. Because failure to pay property taxes can result in a tax lien or foreclosure, some lenders require borrowers to maintain an escrow account to ensure that the payments are being made on time.
Your lender must work directly with the county tax collector to obtain the information on your property taxes. The county sends the tax bill to the lender for review. The lender then makes a payment to the county using the money from your escrow account. You should also receive a copy of your tax bill for your records; however, you don’t need to pay your tax collector directly.
How to Set Up an Escrow Account
Most mortgage lenders allow borrowers to set up escrow accounts to cover insurance premiums and property taxes. Each lender sets its own rules around such accounts. However, mortgage lenders must send you annual statements of your escrow account. These provide key details such as the money held in the account and the payments you’ve made.
Money required to be held in the account may change in time as insurance premiums and property tax assessments may rise or dip. In case of shortages in the account, the lender usually covers the difference before increasing your interest rate account for the difference.
What Happens at Citrus Heritage Escrow?
During the escrow period, our title department begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200