When you purchase a home with a mortgage, your monthly payment will likely include your loan’s principal and interest, as well as property taxes, homeowners’ insurance, and private mortgage insurance (if applicable). If you’ve owned a home before, this information probably sounds familiar. If you’re a first time buyer, however, this can be a little counterintuitive – after all, why the heck would your property taxes be paid to your lender in your monthly payment? The lender sets aside this money in an escrow account, which is then used to pay your yearly taxes and homeowners’ insurance. Ultimately, this serves to protect the lender from tax liens and other uninsured losses.
The good news is that escrowing your property taxes (and all the other stuff) can make your life way easier. First, it doesn’t require you to make multiple payments, and it allows you to better understand all of your expenses when you purchase a home. But perhaps most importantly, it saves you from paying a huge tax bill once per year by allowing you to pay in monthly increments. When you’re shopping for a home on EveryHome.com, you’ll find that our Closing Cost Calculator includes property taxes and homeowners’ insurance when estimating your monthly payment.
Some borrowers will have the option to avoid escrowing these funds. Typically, to avoid escrow, you must have at least an 80% loan-to-value ratio and the lender may impose a higher interest rate because it’s considered an additional risk. Generally speaking, we recommend that all new homeowners escrow their taxes (because it’s hard enough to budget for a home, let alone save up to stroke a huge check for taxes each year!).