Why do I need to put money into a escrow account?? I have already had to pay for one full year of homeowners insurance already? Why do I need to come up with more money for closing?
That is a common comment or question from many Metro Detroit first time home buyers. Whether you are Buying Livonia real estate or Farmington home it's the same. To explain it simply..... an escrow account it is basically a savings account set up by your mortgage company to make sure your property tax and insurance money is there when it comes due.
You can't give an IOU for taxes.
In the Metro Detroit area we have two taxes a winter tax and a summer tax. The winter tax is due Dec 1 and it covers from Dec 1 until November 30 of the next year. The summer tax is due July 1 and covers until June 30 next year.
Each month you make a house payment your payment includes 1/12 of the summer taxes, 1/12 of the winter taxes, and 1/12 of your homeowners insurance. Let's say we are going to close on November 1. You are going to make one payment before December 1. So you will have only 1/12 of your winter taxes in the account. But 12/12 is DUE!!! So the mortgage company is going have you put 11/12 of the winter taxes in the account if you close on November 1. That way you will have the full amount that is due on December 1.
The same thing goes for summer taxes. It's due on July 1 and you are only going to make Dec, Jan, Feb, Mar, Apr, May, Jun, payments. That's only 7/12 of the amount due. You have to have 12/12 to pay your summer taxes. So the mortgage company is going to have you bring 5/12 of the summer taxes to closing.
So basically you need to set up your "savings account" for property taxes and home owner insurance so the mortgage lender can pay your bill when it comes due. That's why you need to bring money to the closing to set up your escrow account.
If you still don't understand this feel free to call me or email me and I'll be glad to explain it to you a little better.
Russ Ravary your Metro Detroit Realtor
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I recently had a client pay a higher interest rate so he did not have to escrow. He said he's expecting massive inflation in the next few years and he really wanted to be the one getting interest on his "savings account". I understand his concept and can't it usually be waived if you pay a slightly higher rate?