Mortgage Escrow Accounts: What They Are & The Options You Have

Mortgage and Lending with NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 IL Lic 031.0006220/WI


Mortgage Escrow Accounts:

What They Are & The Options You Have


The topic of "borrowing power"  and questions surrounding "how much home I can buy" are raised almost immediately by prospective mortgage clients during our first conversation together ...  

It's understandable and natural.  They're excited and anxious.  That's especially true when the client is a first-time home buyer.   


Most are laser-focused.  Their ultimate goal is to find out:  


"What's the maximum amount of money I can borrow?"  Or when purchasing, the question is often simply, "What price of home can I view?"  Again, that's understandable.


But while that information is certainly a portion of what must be discovered and explained during our conversations (and ultimately during the Pre-Qualification/Pre-Approval process), in actuality, it's not the dollar amount or Sales Price of homes they should be most concerned with.


No, their focus and concern should really be on the dollar amount or total  Monthly Mortgage Payment they can qualify for.  A payment that will be dictated by several things, including:


  • The Sales Price of the home being considered 
  • Real Estate Taxes on that specific property 
  • The cost of the Homeowner's Insurance coverage needed for that property 
  • If Mortgage Insurance is needed in order to purchase the home  
  • If an HOA Fee (Homeowners Association) comes with the specific property being considered

I've touched upon this important topic previously, most recently in my post, "How Buying in a Homeowners Association Can Affect Mortgage Approval and Monthly Payments".  But the crux of this post (and others I've written) center around:


How the choice and location of your home purchase 
can affect your "purchase power" and subsequently, 
your qualifying mortgage payment.  

This is truly the "bottom line" when seeking financing and Mortgage Approval.  It's a topic you and I will revisit often as you navigate your search for your home.  During your search, I'll make sure you have all the information you need to seek a home that's a good financial fit ... plus provide you sound guidance to help secure a successful Mortgage Approval.


Below you'll find a breakdown showing what comprises a Monthly Mortgage Payment and an explanation of each component:

The basic components: 

       1.  Principal and Interest Payment for the loan (P&I)
     Per the Consumers Financial Protection Bureau:  The principal is the amount you borrowed and have to pay back, and interest is what the Lender charges for lending you the money

Escrow Accounts typically include these expenses:


     2.  Real Estate Taxes  (1/12th of Annual Tax Bill)

     3.   Homeowners Insurance  (1/12th of Annual Premium)

     4.  Mortgage Insurance  (PMI or MIP, if applicable)


*  Note, Homeowners Association Fees:  (HOA, 1/12th of Annual Fee, if applicable), are factored into the Housing Expense Consideration for Debt To Income Ratios (But NOT Escrowed), and are paid outside of the Mortgage - typically to a third party Management Company of Homeowners' Association.

Item numbers 2, 3, and 4:  Are items considered in the "Escrow". 


In the State of Illinois:  Escrow means "any account established by the mortgage lender in conjunction with a mortgage loan on a residence, into which the borrower is required to make regular periodic payments and out of which the lender pays the insurance and taxes on the property covered by the mortgage". (Illinois Mortgage Escrow Account Act)

Escrow payments are collected monthly by the Lender (or Mortgage Servicer) via the Monthly Mortgage Payment, then disbursed/paid-out after accruing in the Escrow Account.  

  • Real Estate Taxes are paid out as tax installments become due during the year  
  • Insurance is paid upon the annual anniversary/renewal date of the insurance policy

FYI regarding Insufficient Escrow Balances:  If the Escrow Balance is insufficient to make a payment, the Borrower is notified, and required to fund the Escrow with a lump sum payment ... or an acceptable increase in the  Monthly Escrow Payment to "catch up" on the shortage during the upcoming calendar year.

In most cases:  Mortgage Lenders REQUIRE that a Borrower maintains an Escrow Account when they do NOT have a 20% Down Payment (or hold  20% or more Equity in the financed home). 

For Borrowers financing in Illinois:  Once the Borrower has paid down their Mortgage Balance to 65% of the original loan amount, the Mortgage Lender is REQUIRED TO NOTIFY the Borrower of their Right to Terminate their Escrow Account ... provided that the Borrower is not in default on their Loan. 

The Borrower can choose to continue their Escrow Account if that serves their needs best.  But at this time, they also have the option of assuming the responsibility for payment of their Real Estate Taxes and Homeowners Insurance (and any HOA Fee) moving forward.  (This waiving of Escrow Account should/must be agreed to in writing for the Borrower's protection.)

For Borrowers making an initial Down Payment of 20% or more at the time of financing:  These Borrowers have the option of paying into an Escrow Account ... or paying Real Estate Taxes, Homeowners Insurance, and HOA Fees (if included) on their own.  This is agreed upon prior to Closing.  

For those Borrowers Refinancing their Mortgage:  Borrowers refinancing at 80% or less of Appraised Value have the same option to waive Escrow.  Again, this must be agreed upon prior to the Closing of their loan.

Escrow ... and how it fits into your home search, home buying, and future Mortgage Payment ... is just one of many things Borrowers need to know and understand.  It's important to seek and find a Loan Officer that will take the time to answer questions, fully explain your options, and help guide you through each step of your financing process.   

Then you will know upon completion of your Closing that you made informed sound decisions for yourself and financial future ...



* When in need of Mortgage info or service when buying a home in New Lenox - elsewhere in Chicagoland - IL & WI, contact me. I'll be happy to put my 40+ years of mortgage experience and expertise hard to work on your behalf.

 I'm easily found at:

Gene Mundt
Mortgage Originator - NMLS #216987 - IL Lic. #031.0006220 - WI Licensed
American Portfolio Mortgage Corp.
NMLS #175656
Direct: 815.524.2280
Cell/Text: 708.921.6331
eFax: 815.524.2281
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Gene Mundt

 Mortgage Originator  -  NMLS #216987    

                                 IL Lic. #031.0006220  -  WI License #216987                                                                                                    

NMLS #175656


Gene Mundt, Mortgage Originator,  40+ years of #mortgage experience, will offer you exemplary mortgage service and advice when seeking:  #Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in #Chicago and the greater Chicagoland region, including:  The #Lincoln-Way Area, #Will County, (#New Lenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Bolingbrook, #Romeoville, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of Chicago, #Cook County, and elsewhere within IL and Wisconsin. 


Your Referrals & Testimonials are Always Greatly Appreciated! 




Re-Blogged 4 times:

Re-Blogged By Re-Blogged At
  1. John Wiley 02/02/2018 03:26 AM
  2. Roy Kelley 03/30/2018 01:00 AM
  3. Gabe Sanders 02/13/2018 11:45 PM
  4. Gita Bantwal 06/18/2018 05:00 AM
Lending / Financial
Illinois Will County New Lenox
1st Time Buyers
Buyer Information - What Buyers Need to Know in Today's Market
home buying
escrow accounts
mortgage information
monthly mortgage payments
escrow payments
mortgage escrows
preparing to buy a home and get a mortgage
home buying advice and tips

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Hella M. Rothwell, Broker/Realtor®
Carmel by the Sea, CA
Rothwell Realty Inc. CA#01968433 Carmel-by-the-Sea

Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi - Even though you are not in California, I have bookmarked this page because it generally tells buyers what they should expect when they need to get a loan.

Jan 31, 2018 04:24 PM #1
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Gene this is a really good in depth explanation.  You did a  Great Job!!!

Jan 31, 2018 04:55 PM #2
Jeff Dowler, CRS
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude


You did a great job here educating borrowers on the essentials of qualifying for a loan and understanding monthly payments, including escrow. It can be confusing, especially for those focused only on how much they can borrow.


Jan 31, 2018 09:58 PM #3
Andrew Mooers | 207.532.6573
Northern Maine Real Estate-Aroostook County Broker

Buyers worry about will I have enough to cover all the closing costs too. Even when the good faith truth in lending paperwork is presented and they do study the numbers of where all the money goes. The all new and different territory when suddenly "kitty" has a new meaning beyond Tiger or Puff. This one needs to be fed monthly rather than morning noon and night. Glad we don't have HOA's Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi !

Feb 01, 2018 03:32 AM #4
Shahar Hillel
Augusta Financial Inc. - Stevenson Ranch, CA
Mortgage Consultant, Loan Officer.

Gene hello.

Very valuable information.

Clarifies lots of ground to the prospective borrowers.

Thank you for a great post.

Good day.


Feb 01, 2018 11:27 AM #5
Anna Banana Kruchten CRB, GRI, WLS
Phoenix Property Shoppe - Phoenix, AZ

Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi you always write such thorough and excellent & informative posts for buyers - and agents!

Feb 01, 2018 12:29 PM #6
Patricia Feager, MBA, CRS, GRI,MRP
Selling Homes Changing Lives

Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi  - Buyers need somebody to trust to help them understand where their money is going and to understanding the mortgage process from a different perspective. You have a way of making people understand with comfort. Your experience is a gift that you give so that others can learn. Thank you for sharing your wisdom. 

Feb 01, 2018 03:20 PM #7
Goran Utvic
606 Homes LLC | Chicagoland Brokers Inc, Chicago IL 60656 - Chicago, IL
We Buy & Sell Chicago Houses Fast

Well said

Feb 01, 2018 07:19 PM #8
Kathleen Luiten
Resort and Second-Home Specialist - Princeville, HI
Kauai Luxury Ocean Home Sales

Like Hella M. Rothwell, Broker/Realtor® I am bookmarking this post, Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi. Now I don't need to spend 30 minutes with a client to explain everything you covered so well! 

Feb 01, 2018 07:33 PM #9
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Your illustration is an excellent tool for first-time home buyers. It's simple, concise and easy to comprehend. Great post.

Feb 01, 2018 09:24 PM #10
Tammy Lankford,
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Broker GA Lake Sinclair/Eatonton/Milledgeville

I've never paid PMI, so I never thought to ask the question before, but is it paid by the lender "monthly" or annually until the LTV reaches a certain amount (with conventional loans, as I do realize it does not end on current FHA loans)

Feb 01, 2018 09:36 PM #11
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL, ECO Broker, GRI, SRES,GREEN,PSA

Gene, working with the consumer on real estate transactions really requires some good, solid, trustworthy education.

You have provided a great guide to understanding how Escrow is a part of the transaction.

This is great information for the consumer.

Feb 02, 2018 03:21 AM #12
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce

Some loan programs require escrow....and others do all our years in real estate we have only had one Seller who paid their own taxes quarterly rather than escrow or pay at the end of the year.

Feb 02, 2018 05:41 AM #13
Richie Alan Naggar
people first...then business Ran Right Realty - Riverside, CA
agent & author

1-800 Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi call contact and engage this man now

Feb 02, 2018 06:25 AM #14
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

Congratulations on your feature recognition. This is important information to share with home buyers.

Feb 05, 2018 04:41 PM #15
Karen Feltman
Cedar Rapids/Iowa City, IA KW Legacy Group - Cedar Rapids, IA
Relocation Specialist in Cedar Rapids, Iowa

This is a wealth of information for would be buyers.  Knowing all of the things to consider when purchasing a home and knowing their budget is important.  Thank you for sharing and congrats on the well deserved feature.

Feb 06, 2018 09:18 AM #16
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Gene, not sure how I missed this great post, and excellent information for buyers!  

Feb 06, 2018 12:10 PM #17
Corey Martin
Martin Presence Group - Ruston, LA
Real Estate and Management Solutions

Great advice for any buyer. Thank you for sharing. 

Feb 07, 2018 07:42 PM #18
Sally K. & David L. Hanson
EXP Realty 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce

Great explanation for first timers and people who "assume" they know but may not !

Feb 14, 2018 04:53 AM #19
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Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi

708.921.6331 - 40+ yrs experience
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