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Understanding the Escrow Portion of Your Mortgage Payment
By Karen Lawson
CMR Columnist
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Soon after making an offer to purchase a home, escrow is opened, and it closes when all conditions of the sale have been met. But there is another kind of escrow common in mortgage lending, which is the portion of your monthly payment allocated for payment of property taxes, hazard insurance, and PMI.
Why Do I Have an Escrow Payment Added to My Mortgage Payment?
With property values reaching all-time highs in many areas, it is difficult for many buyers to come up with a down payment of 20% of the purchase price of their home in order to qualify for conventional financing. "Conventional" financing refers to a loan that is amortized over 30 years, and the monthly payments consist of principal and interest.
If you don't have a 20% down payment, you may still qualify for a home loan, but your lender will collect an amount equal to 1/12 of the estimated total for the annual amount of hazard insurance premiums and property taxes. For loans requiring PMI, or private mortgage insurance, the lender will also collect 1/12 of the amount of the annual PMI premium as part of your monthly payment. The amount collected for insurance, taxes, and PMI is called the escrow portion of your payment, which you pay each month in addition to principal and interest (P& I).
How Escrow Payments Work
The annual estimated amount needed for your escrow account is divided by 12. This amount is added to your monthly principal and interest payment. Your lender is responsible for timely payment of the funds collected from you to the insurers and taxing entities, and will provide an annual statement, or escrow analysis, showing how much you paid into your escrow account, and how much was paid out for property taxes, hazard insurance, and PMI. Based on this information, the escrow portion of your payment will adjust each year.
If you don't understand or agree with your escrow analysis statement, contact your lender for additional information.
Sources
Fannie Mae
About the Author
Karen Lawson is a freelance writer with fifteen years of experience in mortgage lending. She earned an MA degree in English at the University of Nevada, Reno.
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