With billions of dollars spent on property taxes and insurance premiums, it’s become important to understand all of the options available to new property owners. One of the main options a new property owner might want to consider is setting up an escrow account.
This type of account is used by millions of homeowners and is often thought of as a high-quality safety net for future expenses. In this article we are going to discuss what an escrow account is, how it works, and the benefits of using one for property taxes/insurance premiums.
What is an Escrow Account?
An escrow account is a designated account used to hold money owed for property taxes and insurance premiums. This account can also go by the name “impound account” in some cases.
In general, the escrow account is set up when a new property is purchased and the lender wishes to collect a predetermined amount in advance. This amount is put into the escrow account as soon as the closing papers are signed.
Please note, the amount of money that goes into the escrow account will depend on the property, insurance premiums, and property taxes. All of this is calculated in advance to help pinpoint a specific percentage that will be allocated to the new account. The general rule is to set aside six months of property taxes and a year’s worth of insurance. Once the account has been set up, the lender is able to collect payments from the fund on a monthly basis. The lender will only tap into this account on the dates agreed upon by both parties.
Benefits of Using an Escrow Account
The convenience of letting someone else handle the monthly payments is useful. It ensures you are able to focus on other things and not worry about upcoming deadlines or the amount that has to be paid. All of this is taken care of by the lender that’s responsible for the escrow account.
This convenience is hard to overlook and can be useful for those wanting to simplify home ownership as much as possible.
Along with being able to move away from these deadlines, you are also going to notice a change in how safe the process becomes. Since the escrow account is set up, the money is already there and it is going to simplify what you have to do.
This ensures you are not going to be making mistakes along the way where a payment is missed.
3) Reduced Responsibility
Being a homeowner is a responsibility and it is one that you are going to take up with a passion. However, it is always nice to move away from this responsibility and let a predetermined account take care of major payments such as insurance premiums or property taxes.
Since these payments are mandatory, you will want someone else to take care of them and this reduced responsibility is a lot easier on the mind. Running around and managing various deadlines and hoping to meet them all is hectic and not ideal.
4) Eliminates Late Fees
Just like any other bill, the late fees will add up if you don’t make payments on time. Since the amount is high, the fees are also going to be through the roof. This is why it’s better to have the escrow account in place so mistakes aren’t made and you don’t end up missing the due date.
Many people miss these due dates and that becomes a major issue when the late fees add up. Instead of dealing with such lapses in concentration, it’s easier to rely on the new escrow account.
5) Can Help With Interest Rate on Mortgage
This is one of the more underrated advantages of an escrow account. The new account is able to help out with the interest rate on your mortgage. If the bank knows you are willing to put down a certain amount of money for property taxes and insurance premiums then it will feel more confident in your ability to make payments.
These are the main reasons to consider escrowing your property taxes and insurance premiums. Thousands of people are using this method and it offers numerous advantages to those who do sign up immediately.