First-time home buyers can sometimes feel like lenders are speaking a different language. Find out what mortgage escrow is, how it is calculated, and why you might want to take advantage of it.
There’s definitely a learning curve when it comes to buying your first home. Realtors, lenders, and mortgage brokers can sometimes assume you already know the process going in. But when the professionals start throwing around industry terms like “escrow” customers can quickly become overwhelmed.
The Definition of Mortgage Escrow
Generally speaking, escrow is money (or anything else) held by one person for the benefit of another. When it comes to mortgage escrow, it is money paid by you and held by your mortgage lender to pay for mandatory expenses related to your new property. When all those expenses are added up, it results in your PITI payment.
What Does PITI Mean?
When you buy a home you aren’t just committing to repay the amount borrowed. Your mortgage payment is always higher than your principal loan amount cut into equal parts. Instead, your mortgage payment is made up of four parts:
- Principal payment on your mortgage
- Interest payment on your mortgage
- Taxes on your property (spread out evenly over 12 months)
- Insurance payments to cover your property (spread out evenly over 12 months)
While your mortgage lender keeps the principal and interest payments on your loan, the taxes and insurance are held in escrow, for use on your behalf. When your state or local property taxes and insurance bills come due, your lender makes sure everything is paid on time.
Should You Waive Escrow?
Some mortgage options, including FHA and VA loans, require you to escrow your taxes and insurance payments. Others, including some Fannie Mae and Freddie Mac loans will allow you to “waive escrow” and pay your taxes and insurance on your own. But should you?
Opting in to escrow can save you money and hassle. By choosing to pay your taxes and insurance through your mortgage company, you receive a mortgage rate discount. You can also avoid possible late fees and interest issued by the government or your insurance company.
Escrow also saves you hassle. Because your PITI is paid together, you only have to write one check instead of three. And because your lender pays your bills out of escrow, you won’t have to worry about delinquent taxes, tax foreclosure, or gaps in your insurance coverage.
At 1st Securities Financial, we never want you to feel in over your head. Our licensed mortgage originators will make sure you understand all the lingo, including explaining what escrow means. If you are ready to take the plunge into home ownership, apply online today and get pre-approved for your first home mortgage.