Scarecrow

When pursuing a Home Mortgage, one can become very anxious when learning about all of the costs that comprise a monthly payment. The mortgage payment is commonly believed to ONLY be comprised of the Principle and Interest, but there are other monthly costs that are added to that payment when the loan value is more than 80 percent (the amount you borrowed from the Lender to purchase the home, i.e., $200,000 Home Purchase, with a 5 percent Down Payment, would result in a 95 percent Loan-to-Value of $190,000 x Interest Rate / Term (360 Months) = Principle + Interest Payment for the Term of the Loan).

ESCROW is the term most often misunderstood and in some cases would cause the Borrower to stop their loan process entirely when presented. It’s a very common misunderstanding, so let’s try to demystify ESCROW a little.

Generally, your mortgage lender can require you to have an escrow account if you borrowed more than 80 percent of the value of the property you bought. (The percentage you borrow against the valuation of the property is known as the loan-to-value ratio.) Each month, in addition to your mortgage payment, the lender collects a prorated amount to be held in escrow. Your lender applies this amount to your annual private mortgage insurance premiums, homeowners insurance premiums, and property taxes. These are expenses you WILL have to pay anyway! Prorating these expenses over a year (12 monthly payments) insures the Lender you’re borrowing the money from to purchase the home of your dreams that these obligations are paid in full and on time. When you only borrow 80 percent of the property value, it means you paid more money (20 percent) down of your own funds, and generally evidences you are not cash limited to make the one-time annual payments of annual private mortgage insurance premiums, homeowners insurance premiums, and property taxes (sometimes as much as $7,000 – $10,000 est. for a $200,000 valued home).

Really, like the SCARECROW, who protects your interests (crops) in the field where he or she may stand, the ESCROW Account protects your interests and investment in the home you purchase. It provides the necessary annual funds to pay the expenses to protect your home against loss and at the right time. The funds accumulate from your monthly payments in your ESCROW Account, and at an amount you can afford within your budgeted housing expenses (determined at the time of preapproval for the value of home you were buying).

This is presented as a courtesy to those who really want to be MortgageSMART, and brought to you by Terri Axelson, MLO, NMLS#1486324, of HomeBridge Financial Services, Inc. You may email her at taxelson@homebridge.com, or call her at 318-617-0431.

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