What is Escrow?
One of the biggest concerns that I deal with from borrowers that are either refinancing or purchasing their home is money being collected for their escrow account. I wanted to take a minute to explain how your escrow account works.
What is an escrow account?
Simply put, an escrow account is a separate account that is attached to your mortgage that holds funds that are paid out for property tax and homeowners insurance. There are regulations in place that require the mortgagee (lender) and/or servicer of the loan to reconcile the account each year to make sure:
- They are not over-collecting each month.
- Collecting enough monthly to pay the annual homeowners insurance and property taxes.
- They they are not retaining excess of what is required.
There should be enough in escrow to pay the tax and insurance payment and having a buffer of no more than two (2) months in the account. Any excess in the account after paying the tax and insurance, and leaving a two (2) month buffer in the account is refunded each year. Conversely, if not enough was collected, the escrow payment is adjusted to ensure that the next year will have ample funds to satisfy the obligations. The important thing to realize is that the escrow account is YOUR money. Instead of getting a bill each year from the county in which you reside and the insurance company, the bill is sent to the lender who in turn pays it on your behalf. Effectively, you would be looking at a bill for thousands of dollars. If you did not plan accordingly for the tax and insurance, or know when it becomes due, you would be subject to a potential hardship. The escrow account is designed to eliminate that risk by collecting 1/12 each month.
I am refinancing my home and already have an escrow account.
That is true. The thing to keep in mind when you are refinancing your home is that the escrow account is your money. You have a couple of options on how you want the current lender to distribute the funds from your escrow account:
- The current lender can keep the funds that are currently in escrow and apply it to unpaid principle. This would lower the payoff of the home.
- The current lender can refund the escrow balance to you. This would be sent somewhere around three (3) weeks after closing on the refinance and is generally sent as a paper check via the mail.
Because the escrow is tied to a particular loan, funds cannot be simply transferred when you refinance. Instead, as the new loan is structured and funded, an escrow account is created with ample funds to satisfy tax and insurance obligations.
Do I have to maintain an escrow account?
Generally speaking, with most lenders, yes you will have to maintain an escrow account. There are exceptions that are made on a case by case basis but have to be approved by the lender as part of the loan approval. Typically, if your loan is a low Loan-to-Value (LTV), and the borrowers have decent credit, an escrow waiver is granted.
How do they know how much is collected for my escrow account?
Each county publishes millage rates, which are the approved tax rate for the area that your house resides. Simple calculation (loan amount * millage rate) gives an amount that would be due for tax minus any homestead exceptions that may apply. If the loan is a refinance, the lender will also look at the tax cert (the amount that you have paid) for the last two (2) years. The insurance is collected either in the form of a quote for a purchase, or a declaration page for refinance. If you add those two (2) values together and divide by twelve (12), you will have the escrow payment.
Why does homeowners insurance show up twice on my Loan Estimate (LE)?
This typically happens on purchase transactions. You will notice in Section F of the LE, it is for prepaids. This amount does not actually go into your escrow account. Instead, at closing, the funds are distributed to the insurance company to initiate the policy. Your LE should show the full amount of the quote that you provided. Section G of the LE is the actual escrow that will be collected at closing. If a full year is collected in section F, you should still see two (2) or three (3) months collected in section G. This is an escrow reserve.
Frequently Asked Questions
How high does my FICO have to be to qualify for a home mortgage?
While there are many factors that influence the qualification of a home mortgage, when it comes to your credit score, we generally say that a 600 FICO will qualify. Depending on debt-to-income and payment history, we can sometimes qualify as low as a 580 FICO.
Why use a mortgage broker instead of applying directly with a lender.
As a mortgage broker, we have contracts with several lenders. Some of the lenders that we have contracts with only fund loans from brokers and do not have a retail department. So by choosing a broker, you have access to more lenders and we are able to shop the rate through multiple sources to ensure that you get a loan to best fit your goals and situation.
What's the difference between a cash-out refinance and a home equity loan?
Home equity loans or home equity lines of credit (HELOCs) are usually second mortgages. In other words, they are mortgages that you take out on top of the main mortgage you have on your home. This makes them second liens against your property and therefore more risky. A cash-out refinance is not a second loan; it is a new first mortgage.
What is equity? How can it help me get cash out of my refinance?
Home equity refers to the appraised value of your home minus the amount you still owe on your loan.
The more equity you have, the more money you may be able to get from a cash-out refinance. Many homeowners take cash out to pay off high-interest debt or make home improvements. Try our mortgage calculator to see if you have enough equity to reach your financial goal.
Why Choose Homewise Financial?
- Application process is completely online.
- Loan specialists available to answer your questions and help you understand the process.
- As a mortgage broker, we have exclusive access to a vast network of lenders to offer competitive rates and diverse loan programs to suit your goals.
- Personalized experience. We will “hold your hand” through the process to ensure your comfortability with the loan program and process.
If you have questions about our company or the process, we want to hear from you. We will communicate with you however you are most comfortable. Simply hit the link to the right, book an appointment, or give us a call. We will be glad to answer any questions that you have.
P.O. Box 24593
Jacksonville, FL 32241