When you buy a home, or just make an offer, you will encounter the term “escrow account”. Like making a friendly bet and asking a third party to hold the wager money, the “escrow agent” is the neutral party that holds funds in the interest of the mortgage lender and the borrower.
When the terms of the purchase and loan agreements have been met, the money is released. When your application is approved and the loan takes effect, the lender will likely require money for property taxes and homeowner’s insurance also to be held in escrow. These funds are added to your monthly mortgage payment and disbursed when the tax and insurance bills are due.
This protects the lender by ensuring a lien isn’t placed against your property for non-payment of taxes, and your home (their collateral) is protected against catastrophe. But escrow also benefits borrowers by spreading the large annual payments for taxes and insurance over twelve months.
For example, if your taxes are $1,600 per year and your insurance is $800, you’re budgeting a reasonable $200 per month instead of making two big payments. Escrow accounts do not earn interest, so if you make a large enough down payment, you may be able to avoid the monthly escrow and pay bills directly. Ask your agent and your lender about the pros and cons.
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