When buying a home in Albuquerque, the term "escrow" will come up frequently. Escrow is a legal arrangement where a third party holds money or property until certain conditions are met. In real estate transactions, escrows provide protection for both buyers and sellers.

An escrow account is established as part of your mortgage terms to hold funds for homeowner's insurance and taxes. Additionally, escrow accounts can be used to safeguard a good faith deposit, ensuring that the funds are allocated correctly based on the sale conditions. In this blog, we will focus on the escrow account used throughout the duration of your loan.

Escrow Accounts When You Borrow Money

When you borrow money to buy a home, whether from a bank or direct mortgage lender, you will be given an escrow account. This account serves as a place for the lender to deposit a portion of your monthly mortgage payment that will cover insurance premiums and taxes. The purpose of the escrow account is to ensure that you do not fall behind on your obligations to your insurance provider or the government by collecting a part of those costs every month.

How It Works

When obtaining a mortgage loan, lenders typically mandate the establishment of an escrow account. This account serves to mitigate risk and ensure timely payment of annual homeowner's insurance premiums and property taxes. Although these expenses are paid on an annual basis, the lender requires a monthly fraction to be paid, with the remaining balance accumulating in the escrow account.

Having unpaid insurance or taxes can result in liens during foreclosure, making it more difficult for lenders to recoup the initial loan. As a result, lenders have a vested interest in ensuring that borrowers stay current on these non-mortgage homeownership expenses.

As the borrower, there are downsides to this arrangement. Your lender typically mandates a minimum balance in the escrow account to safeguard against potential cost hikes. Most lenders require you to maintain at least two months' worth of expenses in the mortgage escrow account.

When it comes to managing your insurance premiums and taxes, there's a convenient option available. Instead of making separate payments, you can choose to pay a portion of these expenses each month. This amount, along with your principal and interest payments, is collected and held in an escrow account. At the end of the year, the money in the escrow account is used to pay your premiums and taxes.

Escrow payments can be adjusted based on the surplus or shortage in the account for the year's payment. The mortgage holder is required to send an annual statement regarding the escrow account, which may also be referred to as a mortgage impound account.

Mortgage insurance premiums are required for borrowers who make less than a 20% down payment. These premiums are held in the escrow account along with other payments.

The escrow agent must provide a settlement statement before closing. This statement will detail all final closing costs, as well as fees associated with the home loan, including prepaid and escrow funds.

Escrow accounts do not cover HOA fees or supplemental tax bills. HOA fees and supplemental tax bills are separate expenses that homeowners are responsible for. Supplemental tax bills can be issued due to new construction or a change in ownership, and the amount cannot be predicted by the lender.

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