The Benefits of an Escrow Account

As a homebuyer, unless you are very wealthy, it is a more than likely chance that you will be dealing with a lender to take out a mortgage to pay for homeownership over time – typically 15, 20, or 30 years. Essentially, after everything has been approved, you will be paying the lender back for covering the cost of your new home.

In addition to paying your mortgage loan, you are also required to have (and pay for) what is called hazard insurance and property taxes. Unlike other bills, these bills only come once or twice a year and, when they do, they are often large.

At closing, you are given two options for handling these bills (sometimes only one, depending on your financial situation). The first option is to open an escrow account that bills you monthly so that you have a substantial amount of funds to pay off the bills when they come. 

The other is to go it alone and save on your own and then pay off the bills when they come.

Indigo Mortgage suggests that escrow accounts are usually the best solution and this blog post explains the benefits of selecting an escrow account.

Ease of Use

It’s true really -- with an escrow account, the lender takes care of everything. All you have to do is keep up on the bills. Speaking of the bills, how does paying into an escrow account quite work? Say you have $12,000 a year in hazard insurance and property taxes. Every month, you will be billed $1,000 by your lender.

In actuality, the lender may require a bit more to ensure the account has padding in case the hazard insurance and property tax bills increase. 

During the year, the lender will send a payment to the hazard insurance company as well as well as to the property tax department of your city or state.

The benefit is that it is stress free for you because it is handled for you and all you do is pay a slightly higher mortgage bill each month to collect that necessary money for those payments.

The only downfall is that your mortgage lender gets to keep any interest earned on that money while it sits in the account because you are technically paying into their account.

Money Management

Another benefit of an escrow account is the fact that you will be able to do much better with your money management. It is easier to keep up with smaller payments than to save to make one large payment. 

After all, if you were saving up to do the one big sum, it really takes quite a bit of discipline to not spend the money you are saving in the first place.  

Help is Here!

At Indigo Mortgage, we must stress that handling hazard insurance and property taxes on your own may not be the best idea and is not actually allowed on a mortgage where there has been no down payment or a down payment of less than 20% is made at purchase. 

Our mortgage professionals are here to help you by explaining the escrow account process and why it will help you keep up with all your obligations and enhance your money management skills.