Taking out a mortgage loan is one of the traditional routes consumers tread to have the chance to have a place of their own but not everyone understands the complexity of payment including that for an escrow account. It is oftentimes intimidating that a lot of homeowners either just pay up month after month while others easily flare up when talking about escrow.
Nerdwallet.com shares that mortgage loans hold the highest amount in consumer debt amount resulting to about $8.2 trillion in total amount. With this, paying for the house also takes the most bite out of your income every month which is usually followed by your student loans. This is the reason why a lot of people are thinking twice before taking out a mortgage loan.
Owning a house is still one of the top American dreams but the most common route is to take out a mortgage loan that you would have to pay for a couple of decades until you can call your house your own. There are those who are able to buy houses in full but that is more of an exception than the rule. Most consumers would have to prove to a lender that they can repay back a mortgage loan to get a house of their own.
But taking out a mortgage loan is not as easy as going to the market and getting steak for dinner. There are signs that you are not ready for a mortgage loan and you need to be able to put the brakes on that application before you get into a financial mess. It is possible that you are just starting out after college and it is better to rent first rather than blow all your money on mortgage loans.
Important facts about your escrow account
If you are trying to understand your escrow payments, here are a few of the things that would help you appreciate the payment better. Studying what the escrow is all about should be a must especially for first time homebuyers.
- What is it made of. You need to understand that your escrow payment is means to pay for your taxes and home insurance. This insurance payment is separate from private mortgage insurance or PMI. The PMI is meant to cover the lender in case you default on your house payments. The insurance included in the escrow account is to keep the property covered from fire and other disaster. The taxes is to ensure that you do not forego payments because the county’s lien supersedes their claim. CNN.com shares that counties in Louisiana and Alabama are some of the lowest tax-collecting places in contrast to some New York suburbs which chart the highest in taxes.
- Why does the amount change. This is one of the things that quickly irates a homeowner especially those that preferred a fixed-rate loan. They are under the impression that their mortgage payments should not change all throughout the life of the loan. And they are correct because a fixed-rate locks in the rate for the duration of the loan preserving the principal and interest payment. But the escrow, which is part of your monthly payment can change. This is because the computation of taxes by your county as well as insurance premiums being dictated by your insurance company can vary year on year. Your lender takes these movements into consideration and adjusts your escrow amount accordingly. One of the common reasons homeowners get fired up because their fixed-rate mortgage loan just increased the monthly amount for the year. One way to be able to compartmentalise this is that even though you only make one payment a month, separate the figures for your escrow and that of your principal and interest payment.
- When are the amounts computed. This is usually done on a yearly basis which is why an increase or decrease in taxes and insurance is not reflected as they come. If there is an increase, which is usually the case, your lender will add the additional amount on your escrow payment the following year.
Advantages of mortgage loan
People have different views of a mortgage loan so if you have one, you might as well look at the benefits that it brings to your finances. Apart from the high payments that it requires from your every month, here are some of the upside of having a mortgage loan in your budget.
- Chance to consolidate your loans. If you look at it, chances are your mortgage loan has the lowest interest rate among all your loan accounts. As you make monthly payments, you are slowly paying off your house and this is measured by your lender as the amount of equity you have on your house. One good thing about this is that you can borrow against that equity again if you are looking at consolidating some of your loans or if you are in need of money.
- Increases your net worth. Your net worth according to Investopedia.com is when your assets exceed your current liabilities and your house carries a big number that goes to your assets. This drastically increases your assets and ups your net worth. This maybe just a number just like your credit score, your net worth (or deficit) is actually a good gauge of how you are doing financially. It lets you know in an instant if you are on track with your goals or if you need to make changes as you go along.
- A chance to leave behind something for the kids. There are instances when you are thinking of financial gifts that you can leave behind for your children and your house could be one of them. You can leave your house over to your kids for their use when they grow up. That is if they are thinking of staying in the same place and neighbourhood to build their own family. But regardless if they want to stay in it or not, there will be no one else to leave the house to but your children. They can choose to stay in it or sell it so they can use the money to buy their own house.
- You can sell it at the end for retirement. Retirement is inevitable and what you can do is to save up so you have enough when the time comes that you are no longer working. One thing you can do with your house when you retire is cash on it. You can either join a lot of retirees who are opting for smaller homes or use the money to retire in another country. Of course if you sell your house, you wouldn’t have anything for your children to leave behind. This is a decision that is much more easier to make if you know that your children are already well on their way to getting their own homes. You can help them by giving them pieces of advice about what to expect with mortgage payment.
You need to understand that your lender would always want to have an escrow account in your mortgage payment because it protects their interest. If a fire breaks out, the insurance will pay and cover for the damages. If also prevents the county from putting a lien on the property for non-payment because they cannot stop the county from seizing your property and they lose.