What is an Escrow Account – and How does it work?

So you found that perfect first home, perhaps in sunny Seward or Lincoln and are ready to make the purchase. But during your first conversation with your mortgage lender, the term “Escrow Account” comes up and you don’t really know that it means. So here’s an easy to understand example of what an escrow account is and does.

It is a bank account used to make payments on your property taxes and homeowners insurance.

Pretty easy, right? But escrow accounts can become confusing in the years after you purchase your house. This is due to the fact that your property taxes & insurance costs most likely will increase in the years to come. So let’s explore some examples of how your escrow account will work.

So how does my Escrow account work when I first buy my home?

  • Your insurance agent and you will work together to determine the correct coverage amounts and items needed for your new homeowners policy.
  • Once you finalize your homeowners quote, your agent will work with your mortgage lender and give them the information needed such as an insurance binder & the bill for the new policy.

Need help determining the right deductible for you?

  • Example time. Let’s say your new homeowners premium is $1,200. Your mortgage lender will now calculate your escrow account. Since a standard homeowners policy is on a 12 month term, it is calculated by taking your premium and dividing it by its term to determine the monthly rate. So $1200/12 months means your mortgage will now include a $100 charge for the escrow account, along with the original loan principal and interest.
  • So now you will be paying in monthly, included in your mortgage payment the property taxes & homeowners insurance. This essentially builds the account during the year so that your mortgage lender can pay for these recurring costs associated with owning a home.
  • But when you first buy your house, you will be required to fund your insurance costs up front for the first year of insurance. This is included with your closing costs on your loan.

How does my escrow account work after my first year of home ownership?

  • Now your homeowners insurance one year later, has increased in cost! Your new homeowners premium is now $1250 for 12 months.
  • So your insurance company will send an invoice to your mortgage lender, and your mortgage lender will cut a check out of your escrow account for the new premium.
  • Now since your premium increased and perhaps your property taxes have increased as well. This means that your monthly mortgage cost has increased! So why did my mortgage increase?

Often times, you will find that your mortgage has increased in costs, this is most likely due to under funding of your escrow account or an increase in property taxes and insurance. Always be prepared for the rise in cost in your mortgage!

How Suhr & Lichty Insurance Can Help

Rest assured – our team is here to help. As independent insurance agents, we represent Nebraska’s best insurance companies, including Farmers Mutual of NebraskaGrinnell Mutual and Progressive.

We can advise you on your insurance options and ensure you’re still receiving the combination of value and protection that is right for your family.

Not a Suhr & Lichty Insurance client yet? Click here to request an insurance review by one of our agents, or call our office at (402) 643-2911.

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