The process of buying a house is stressful for most people. It requires paperwork and large sums of money to cover expenses like the downpayment and closing costs, not to mention packing up and moving everything you own. Getting a mortgage also involves some new terminology. One of those terms is escrow. You might be wondering what escrow is exactly, and how much it costs. Read on to learn how to calculate escrow for your home mortgage.

What is Escrow?

Going into escrow means entering a financial agreement between two parties. In the case of buying a house, the buyer agrees to purchase the home from the seller.

In escrow, a neutral third party holds both the financial deposit and the agreement. The escrow party is responsible for holding funds until they’re distributed in the final sale.

Earnest Money

Once there’s a purchase agreement between the buyer and the seller, the buyer puts down a good faith deposit, referred to as earnest money. This money shows the seller that the buyer is serious about the transaction. Often times the agreement is set up so the seller would lose the earnest money if they backed out of the sale.

However, this is usually only a small percentage of the sale price, often about 1% to 5%. This money is not held by either interested party or their realtors. It waits in the escrow account. So, the neutral third party escrow holds the money while the sale agreement goes through the steps of changing ownership.

Factors When You Calculate Escrow

The escrow previously discussed was for the short term, put in place while the sale proceeded. There’s also an escrow account created by your mortgage lender that will exist for the life of the loan. Each month, as part of your mortgage, the lender collects money to pay your taxes, insurance, and HOA fees.

Your mortgage company will calculate your mortgage based on your loan amount and interest. Then they’ll figure out how much additional money is needed to add to your payment. They take the total amount of those additional fees and divide by 12. Then they add that amount to your monthly mortgage payment.

Once those bills are due, they pull the money from the escrow account and pay them on your behalf.

Since taxes and insurance rates fluctuate, so might the payment amount. Your mortgage lender cannot legally hold extra funds and may need to give you a refund if they collected too much. They might also increase your payment amount if they anticipate a shortage in covering the bills associated with your mortgage.

Understanding How to Calculate Escrow and What It Means

How to calculate escrow is an important part of determining a mortgage payment, and knowing what you can afford. For this reason, you need to look not only at the price of a house, but also the taxes and insurance costs associated with the property.

If you’re in need of escrow services for a home or business purchase, we can help. Contact us today to discuss your escrow needs.