Michigan mortgages – explanation of escrows

When you get a Michigan mortgage you may need escrows…Here is a my explanation of escrows.

Escrow definition:

When you have less than 20% down (less than 20% of the purchase price)  the banks and lenders require you to have escrows.  Escrows are basically a savings account that money is put aside for your taxes and homeowners insurance.  You don’t have a choice whether to have escrows or not if you have less than 20% down.

My thoughts on why banks require escrows are….. you don’t have the 20% down payment so you aren’t a “grade A” saver.  They think you are a bigger risk.  So the lender or bank want to make sure that you have the money to pay the Michigan property taxes and home owners insurance each year.  So they set up an escrow account.  Each month when you make a house payment you will also be paying 1/12 of your property taxes and 1/12 of your home owners insurance.  So when the home owner insurance bill comes due you have the money to pay it.

The bank takes care of paying them for you.

So now let’s give you a real life explanation of escrows and why you need money to set up an escrow account.

Let’s say your winter taxes are $1200, summer taxes are $3000, and your homeowners insurance is $600.  Now lets break it down into monthly payments your winter taxes are $100 a month, summer taxes are $250 a month, and your homeowners is $50 a month.  Now lets say you are closing on February 28.  Your first payment is going to be April 1.

So $2500 summer taxes are going to be due July 1.  So you are going be having $250 of your payment go to summer taxes each month.  But you only are going to make April, May, June, and July payments.  That’s only 4 payments of $250.  That’s a $1000 but you owe $3000.  So where is that money coming from?  You have to set up the escrow account when you go to the closing table.  So you need $2000 for the summer taxes.

Now let’s figure out winter taxes due Dec 1.  So you will be having $100 of your house payment go to winter taxes each month.  But again you only are going to make April, May, June, July, August, Sept, Oct, Nov, Dec payments.  You will be short 3 months payments.  3 X $100 so you need $300 for your escrow account.

Again we do the same thing for your home owners insurance policy which will be due next February 28.  So they will collect 1 month of your homeowners insurance.  $50.

So $2000 + $300 + $100 is $2400.  You will need $2400 to set up your escrow account so you will have enough money to pay your property taxes and homeowners insurance when they come due next year.   Every year the banks do a check to make sure there isn’t too much money or too little money in your escrow account.  There is a federal formula that that banks and lenders have to use to make sure you have the right amount of money in your escrow account.

If you don’t understand this explanation of escrow accounts feel free to call or email me.  My cell is (313) 310-9855 amd email is Yesmyrealtor@gmail.com

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Livonia real estate and Wayne County home buyers tips

Oakland County water front real estate

How much will the property taxes go up after I buy the home

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