Understanding Escrow: Payments and Loan Closings
Escrow services relate to real estate and the mortgage industry. It’s a method of providing security and structure to transactions. There are two types of escrow: escrow for bank payments and escrow for loan closings. Understanding these can help individuals navigate financial transactions with confidence.
Escrow Included with Monthly Mortgage Payment
Escrow accounts are commonly used in mortgage payment arrangements. These accounts are designed to ensure that certain property-related expenses are paid on time and in full. Escrow collection coincides with your monthly mortgage payment, and typically is a composite of four key components, including:
- Principal: This is the portion of your payment that goes toward reducing the original amount borrowed.
- Interest: The cost of borrowing money from your lender, which is calculated based on your loan's interest rate and your current outstanding principal balance.
- Property Taxes: Levied by your local government, these taxes contribute to public services and infrastructure in your community.
- Insurance Premiums: This includes your homeowner’s insurance, which protects your property against damage, flood insurance, and possibly private mortgage insurance (PMI), if your down payment was less than 20%.
Kris Farwell, VP, Director of Mortgage, said, “The lender manages the payments towards your principal and interest directly. However, the funds for property taxes and insurance premiums are held in an escrow account. This account is managed by your lender to ensure timely payments to the appropriate entities on your behalf, provided the lender is supplied with the detailed invoices.”
Escrow Account Management
You are required to maintain a minimum balance in your escrow account to cover these obligations, with the amount based on invoices received for your specific property. During an annual escrow analysis, your lender assesses the escrow account to ensure sufficient funds are available. If there is an excess, you may receive a refund for the difference. Any excess greater than $50 must be returned to the borrower. Conversely, if the account is underfunded, your monthly mortgage payment will be adjusted to reconcile the shortfall over the next 12 months.
It’s important to review your annual escrow analysis and check for the following:
- Large premium increases
- Review your coverage. Is the coverage in line with the value of your home and the cost to rebuild in the event of a tragedy?
- Are my deductibles manageable, should I have a loss?
- Make sure you are not overinsured.
If you make a change from one insurance company to another:
- Inform Coulee Bank of the change
- Indicate Coulee Bank is the Mortgagee
- Instruct the insurance company to bill Coulee Bank for the annual premium
- Refunds from the cancelled policy should be returned to Coulee Bank and credited to your escrow.
Escrow for Loan Closings
Escrow for loan closings is used to hold funds and key documents until all the terms of the sales agreement are met. Farwell said, “Being in escrow essentially means you are in limbo – not quite finished with the deal, but you are on a path to close on a home while the property, cash, and title are being held safely while details are finalized.” While in escrow, the buyer is not able to take possession of or occupy the property.
Assets may be held in escrow for the following reasons:
- Appraisals
- Home Inspections
- Financing and Insurance
- Title Searches
- Zoning Regulations
- Property Repairs
By understanding these two types of escrow, individuals can better navigate their financial obligations, whether they're making regular payments to a lender or finalizing a property purchase. Both types of escrow provide a structured, secure framework for managing funds and responsibilities in complex transactions.
“If you have questions regarding your escrow account, you can contact the loan servicing department,” advised Farwell. Here is the contact information: [email protected] or 866-784-9550.