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

Reblogger John Wiley
Real Estate Agent with Right Move Real Estate Group- EXP Realty SL3287291

The consumer is often confused about all the aspects of a mortgage. Gene Mundt has provided a very clear description of what is Escrow and how it is handled.

I think this information would be valuable to share with all buyers and especially those who are First Time Home Buyers.

 

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
 
 

  

 Twitter Account of Gene Mundt, Mortgage Lender   LinkedIn Account of Gene Mundt, Mortgage Lender   Facebook Acct. of Gene Mundt, Mortgage Lender   Pinterest Acct. of Gene Mundt, Mortgage Lender   

   Gene's Chicagoland Blog/Gene Mundt, Mortgage Lender  

    

 

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! 

 

Email Me .. to be added to my Mortgage & Real Estate Newsletter

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Rainmaker
1,497,414
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning John - this is a very import repost from Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi .  That total morgage payment can add significantly more to the principal and interest.

Feb 03, 2018 09:08 AM #5
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Grant, thanks for contributing to the discussion.

Indeed, it is more than principal and interest.

Feb 03, 2018 04:52 PM #6
Rainmaker
1,143,590
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

Greatly appreciate you sharing this info with your readers, John Wiley ... and your very kind intro ... thank you!

Gene

Feb 05, 2018 12:48 PM #7
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Gene, thank you for sharing information that is valuable to the buyer.

Feb 06, 2018 03:47 AM #8
Rainmaker
3,481,329
Joan Cox
Metro Brokers - House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

John, great post to reblog, as Gene always has some great mortgage information to share!  

Feb 08, 2018 07:14 AM #9
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Thanks Joan, I appreciate having members like Gene and yourself that provide some quality input to all of us.

Thanks for your comments.

Feb 08, 2018 12:00 PM #10
Rainmaker
2,556,288
Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

With so many options, it can be a maze of crazy if you get too caught up in all the hustle of it. It can be nuts, but ver rewarding too!

Feb 20, 2018 11:54 PM #11
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Laura, for many consumers you said it well: it can be a maze of crazy.

Thanks for commenting.

Feb 21, 2018 03:54 AM #12
Ambassador
2,253,870
1 ~Judi & Don Barrett & Chassy Eastep - Integrity
Integrity Real Estate Services 118 SE AVE N, Idabel, OK 74745 - Idabel, OK
BS Ed, Integrity Real Estate Services -IDABEL OK

There is usually much more to the payment han principal and interest.  AND even with local banks that do not escrow, the home buyer still needs to budget for those items and include the amount in what they can afford when deciding which home to purchase.

Mar 10, 2018 03:31 PM #13
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

You are so right Judi. The buyer should be made aware of all expenses.

Thanks for commenting.

Mar 11, 2018 05:21 AM #14
Rainmaker
1,396,555
Yolanda Cordova-Gilbert
Sitterle Homes - Richmond, TX
Sitterle Homes

John,

 This is an important blog with lots of good information and Gene is a good one to re-blog! I hope you have a great Easter weekend!

Mar 30, 2018 02:26 PM #15
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Yolanda Cordova-Gilbert thanks for your encouragement.

Many people agree with you that Gene did provide a valuable post.

Have a Blessed Easter.

Mar 31, 2018 04:00 AM #16
Ambassador
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Jeff Dowler, CRS
Solutions Real Estate - Carlsbad, CA
The Southern California Relocation Dude - Carlsbad

Hi John:

You picked a terrific pot to reblog...I think there is a lot of misunderstanding about what a mortgage escrow account is and how it works. Gene's post is excellent education.

Jeff

Apr 03, 2018 08:16 AM #17
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Thanks Jeff, I agree that there is a lot of misunderstanding when it comes to a mortgage escrow. Glad you liked Gene's great information.

Apr 03, 2018 09:00 AM #18
Rainmaker
47,720
Khash Saghafi
Liberty Home Mortgage Corporation - Cleveland, OH
Mortgage Loan Officer, Cleveland Ohio

Thank you for sharing John. It definitely never gets old re-reading guidelines!!

Apr 21, 2018 11:45 AM #19
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Thanks Khash.

I find that reminders are a big help.

Thanks for commenting.

Apr 21, 2018 11:55 AM #20
Rainmaker
2,670,738
Endre Barath, Jr.
Berkshire Hathaway HomeServices - Beverly Hills, CA
Realtor - Los Angeles Home Sales 310.486.1002

John, there are so many valuable blogs in AR to re-post and this is one of those, glad you did, Endre

Apr 26, 2018 10:13 PM #21
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Endre, I could not agree more, the wealth of resources on AR come from our members who so graciously share.

Thanks for commenting.

Apr 27, 2018 04:44 AM #22
Rainmaker
3,481,329
Joan Cox
Metro Brokers - House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

John, great choice for a reblog, and Gene always has some tips for borrowers thinking of buying a home.

Apr 28, 2018 06:01 AM #23
Rainmaker
335,436
John Wiley
Right Move Real Estate Group- EXP Realty - Fort Myers, FL
Lee County, FL Real Estate GRI, SRES,GREEN,PSA

Thanks Joan for commenting. I am always looking for good tips to share with buyers.

Apr 28, 2018 06:45 AM #24
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John Wiley

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