Couple at kitchen table paying bills on laptop
Couple at kitchen table paying bills on laptop

escrow 101

Everything covered with one monthly payment

Escrow means one monthly payment

When you borrow money to purchase a home, you’ll have several bills:

  1. Mortgage payment
  2. Property taxes
  3. Homeowners insurance
  4. Private Mortgage Insurance (in some instances)

You’ll pay your mortgage payment once a month. But the other bills are due less often. (Property taxes, for example, are usually due every six months.)

With an escrow account, instead of you paying each bill when it is due, you’ll make one payment each month to your bank. Then, your bank will pay each of these bills for you as they come due.

Here's an example:

You just purchased your new home. Let’s say your bills look like this:

Mortgage: $1,000 each month/ $12,000 a year
Property taxes: $1,200 every six months/ $2,400 a year
Homeowners insurance: $900 every six months/ $1,800 a year
Private Mortgage Insurance: $1,800 a year

Together, these add up to $18,000 for the year. With an escrow account you'll pay a monthly bill of $1,500 to the bank. Then the bank will pay each of these bills for you as they come due.

Is escrow a requirement?

There are two instances in which you’re required to pay into an escrow account:

  1. If the amount you borrow to buy your home is greater than 80% of your home’s value. For example, you borrow $250,000 and your home value is $300,000. The amount you borrowed is 83% of your home’s value.
  2. If your home is in a flood hazard area.

Otherwise, an escrow account is typically optional. But many new homeowners choose to escrow even if they don’t have to. They like knowing they won’t have to save for tax and insurance bills.

Think about it this way: They won’t have to worry when a $1,200 property tax bill arrives in June as they’re preparing to leave for summer vacation! With escrow, they already paid the bank in monthly increments for their tax bill. The bank will pay the tax bill for them.

Who determines my escrow amount?

Once a year, your bank does an analysis to determine how much you should pay each month into escrow. The amount will depend on two things:

  1. The property tax amount due determined by the respective tax authorities of your property.
  2. The amount your insurance company charges you.

The amount you pay for escrow will vary from year-to-year because taxes and insurance change (at least a little bit) every year.

There could be an instance when your escrow account doesn’t have enough money in it to pay all your bills. Some scenarios that could cause this are:

  1. Your property taxes or insurance increased unexpectedly.
  2. A tax bill due date has changed and needs to be paid earlier than expected to avoid a late fee.
  3. You change insurance companies, and your new insurance bill is due on a different date than the previous insurance bill.

If this happens, you may need to pay more into your escrow account to make up the difference.

What if I'm building a house?

If you borrowed money from the bank to build a house, your tax and insurance bills will likely be lower during the construction phase. Those bills will increase significantly once construction is completed. Then your taxes and insurance will be re-figured based on the value of your newly constructed home.

When it comes to your new home, setting up an escrow account will simplify bill payment. It takes the worry out of mortgage, tax, and home-related insurance bills, giving you peace-of-mind that each bill will be paid when it is due.

If you have questions about escrow, or want to explore a mortgage loan, you can find and contact a nearby First Financial Bank mortgage loan officer here.