Escrows, mortgage and real estate explanations

Mortgage definitions

Escrows  or escrow account

– The easy explanation for escrows is a required savings account for property taxes and homeowners insurance (required by the bank).

When a Michigan home buyer gets a mortgage they are sometime required to have escrows or choses to have escrows.  A escrow account is set up so that the taxes and insurance can be paid when they are due.  So when a home buyer pays their mortgage payment each month 1/12 of the taxes and 1/12 of the homeowners insurance is included in the payment.

So let me explain.  Lets  say a Metro Detroit home buyer new home has Michigan property taxes of $2400 a year and the homeowners insurance is $600 a year.  Divide $2400 by 12 months and you get $200 a month.  You need to put away $200 a month in order to have enough money to pay the property taxes when they come due.  Do the same thing for home owners insurance.  $600 divided by 12 is $50 a month.

Now lets say you are buying a new Canton home in June, the Michigan property taxes are due Dec 1 and the insurance will be due next June.  If you buy the home in June your first mortgage payment won’t be due until August 1.  So you have to have $2400 to pay the property taxesin December.  So you will have 5 months of August, September, October, November, and December and all the property tax money will be there.  But you are only putting in 1/12 each month.  5 months of $200….. $1000 total is all you will contribute when making your monthly mortgage payment.  

So when you get the mortgage the bank will require you to come to the closing table with $1400 to set up the property tax escrow account.

The bank does the same thing for insurance.  You will have 11 months of mortgage payments.  Included in your mortgage payment will be you escrow for taxes.  So in those 11 months you will end up coming up with $550.  11 months X $50.  $50 short of what is needed to pay your homeowners insurance payment.  So the bank will require you to come to the table with $50 to set up your escrow account.

So you will need $50 (homeowners ins) + $1400 (property taxes) to set up your escrow account.

My quote of the day is:

A truly rich man is one whose children run into his arms when his hands are empty.
– Anonymous


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