Understanding Real Estate Taxes and Funds in Escrow

Mortgage lenders, real estate firms and title companies provide escrow accounts to ensure that funds are allocated in advance for a variety of items.

Perennial Funding provides helpful tips for borrowers who would like a greater understanding of escrowed accounts for real estate transactions.

Special Escrow Accounts

Designed to safeguard the interests of various parties, a special escrow account may be used to secure an earnest money deposit, a down payment on a real estate sales contract or to hold money toward closing costs.

Special escrow accounts are also used in real estate transactions to withhold the distribution of proceeds until specific property repairs are completed.

What is the Purpose a Mortgage Escrow Account?

In a situation where a borrower makes a down payment that is less than 20 percent of the purchase price of a home or when a refinancing transaction will result in a new loan that exceeds 80 percent of the property’s fair market value, most lenders will require the establishment of an escrow account.

The escrow account is used to partition a portion of a borrower’s monthly mortgage payment to fulfill ongoing expenses to other entities. Generally, a monthly mortgage payment will consist of principal, interest, taxes and insurance.

For a traditional home loan, the principal and interest payments are due each month to a mortgage lender. When an escrow account is required, real estate taxes are also collected each month for distribution to local government entities, and insurance payments are collected to cover the costs of a homeowners insurance premium.

When an escrow account is set up, a mortgage lender will usually collect one-twelfth (1/12th) of an item’s annual cost each month. In some cases, a mortgage lender may require an escrow reserve or a two-month cushion for certain expenses.

For example, if a borrower were required to pay $1,200 per year in property taxes and $300 per year for homeowners insurance, a lender would collect $100 per month toward the annual cost for property taxes and $25 per month for homeowners insurance.

Therefore, if $1,200 is the monthly payment that is needed to cover the principal and interest for a home loan, a total payment of $1,325 would be due each month to fund an escrow account for taxes and insurance, when using the aforementioned example.

Generally, the funds for escrowed items are sent to the respective entities on an annual or a semi-annual basis.

We have included the following charts for escrows below:

Contact Perennial Funding at (888) 826-4856 for additional information about the collection of escrowed items or to discuss home buying strategies with one of our licensed loan specialists.

Request a free consultation!