Dear Egghead: What is an escrow account and why do I need one?
Answer: Should you worry about escrow? No, that’s the whole point. Escrow ensures that everyone’s financial obligations are met.
When you get right down to it, escrow is a legal mechanism where a neutral third party holds money or property until an objective has been met. Regarding real estate, an escrow account holds your payments for property taxes and homeowners insurance. The arrangement ensures these payments will be made, not dependent on the home owner. Most homeowners are fine with this setup, because it’s a “set it and forget it” arrangement. Everyone is safe.
Calculating escrow payments is straightforward. If your yearly tax bill is $3,000 and insurance is $500 annually, your escrow payment would be $292. That’s $3,000 plus $500 divided by 12 months.
If you end up paying too much, your lender will probably send you a refund check. If you underpay, you’ll probably pay an increased amount over the next 12 months.
An escrow account is pretty much mandatory if a commercial lender is involved. The lender wants to be sure everyone meets their obligations.
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