Many industry terms are consistent throughout any real estate transaction…title, settlement, mortgage, escrow…and each of these plays a significant role in the home buying process. Today, we would like to discuss the value of having a mortgage escrow.
In our Highland Title + Escrow Blog, we have previously discussed the difference between title and escrow so it may be beneficial to pause here, and take a quick look back at that recent post. Go ahead; we’ll wait.
…And we’re back. So why is it important to know how and why mortgage escrow is beneficial? Some individuals think that title companies set up these accounts. However, Highland Title + Escrow is not the entity that sets up the mortgage escrow account. The actual account is set up by the lender, and it will begin with money collected upfront on the ALTA Settlement Statement as the escrow account prepayment.
Just a quick note…many first-time home buyers are actually surprised when the first monthly payment comes due, and they note on the bill that it isn’t just for the principal and interest payment. Escrow typically helps them cover property taxes, homeowner’s insurance premiums and other annual expenses associated with property ownership, and payments are divided over the calendar year each month.
Let’s get back to the benefits. There are a few…
- In most Northern Virginia cities and counties, taxes are paid in arrears, and they are typically paid in July for the first half of the year and in December for the second half. The money for those taxes will be collected by the lender over that six month period so when the bill comes due, the money is there. You may be thinking, “I would rather hold that money in my bank account and collect some interest.” The interest, even with higher interest rates, would be minimal at best, and the convenience and confidence that the taxes will be covered is worth that small amount of interest and peace of mind.
- Monthly house payments include everything that goes into the escrow account. For the most part, that monthly payment remains constant. If anything were to change, whoever owns the loan would contact the homeowner, but a consistent, monthly payment allows homeowners to budget for the month without having to worry about additional premiums and payments.
- The lender will do a yearly audit of the escrow account to ensure that all of the expenses associated with the account are being covered. Should the lender discover the account is short of money, they will contact the homeowner and usually give them the option to bring the account current in one payment or spread the payment over the next calendar year. Should the lender discover the account holds too much money for whatever reason, the homeowner would receive that money back due to rules and regulations regarding escrow accounts.
Most lenders require an escrow account to protect their loan, and they also receive benefits. (Should the lender waive the escrow requirement for any reason, there is typically a waiver fee applied because they will still be checking in to ensure all premiums and taxes are paid.) For example, the lender wants to ensure that homeowner’s insurance premiums are being paid. If the home burns down or if any other catastrophe ensues, they’ll want to recover the cost/balance of the loan.
Should foreclosure on the property occur, the only entity that can step in front of the lender for collections is the county for collection of the property taxes. For this reason, the lender collects and pays the taxes through the escrow account to protect their interest in the property.
Some often wonder if escrow accounts cover Homeowner’s or Condominium Association dues. The answer is no. In Virginia, if the Lender were to foreclose, their foreclosure would typically wipe out the Homeowner’s or Condominium Association dues. Because the Lender’s Deed of Trust is typically superior to unpaid dues, the Lenders do not escrow for those dues.
Should you have more questions regarding the importance and benefits of mortgage escrow accounts, please contact us at (703) 723-3300, or click here. We are happy to assist you regardless of where you are in the process.