If you own a house, you’ll have to pay property taxes. If you have a mortgage, your lender will require you to purchase homeowners insurance. In some cases, you’ll also have to pay for insurance that’s designed to protect the lender in case you default on your mortgage. If you take out an FHA loan, funds to cover those expenses will be administered through an escrow account.
What Is an Escrow Account?
An escrow account is an account administered by a third party in which funds are held to be used for specific transactions. In real estate, homeowners often have an escrow account set up to handle payments for property taxes, homeowners insurance, and private mortgage insurance, if applicable.
Funds to cover those expenses are added to a borrower’s monthly mortgage payments and put into an escrow account. When tax and insurance bills are due, payments are made on the borrower’s behalf.
This arrangement forces borrowers to work those expenses into their monthly budgets. Putting money into escrow on a regular basis helps homeowners avoid facing large bills that they can’t pay.
This practice also protects the lender. Since money for taxes and insurance is collected monthly, the lender doesn’t have to worry about a tax lien against the property or a loss that isn’t covered by homeowners insurance because of an unpaid premium bill.
Is an Escrow Account Required for an FHA Loan?
In many cases, homeowners can choose to have an escrow account or to handle bills for taxes and insurance themselves. If you take out a loan through the Federal Housing Administration, you will be required to have an escrow account.
How Much Will You Have to Put in an Escrow?
The amounts that you will have to pay each month for taxes and homeowners insurance will be based on estimates. If the actual amount that you owe turns out to be higher or lower, your future payments will be adjusted so that you pay the correct amount.
For a conventional loan, private mortgage insurance is required if a borrower puts down less than 20% of the purchase price. That insurance is designed to protect the lender and to pay off the mortgage if the borrower defaults.
If you take out an FHA loan, you will be required to pay mortgage insurance premiums. This form of private mortgage insurance applies specifically to FHA loans. Depending on the amount you put down, you might have to pay for MIP for 11 years or for the entire loan term. If you default on the loan, the lender that issued your mortgage will be compensated.
How Long Do You Have to Keep an Escrow Account?
You will have to maintain an escrow account for as long as you have an FHA loan. If you want to eliminate the escrow requirement and take care of taxes and insurance yourself, you can refinance to a conventional mortgage through a lender that doesn’t require an escrow account.
