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    Homeowner Escrow: Where Does Your Monthly Payment Go?

    When you buy a Naples home, you must pay an Earnest Money Deposit. This provides a sort of protection for the buyer because the seller promises not to continue marketing the property while you go through the buying process. Plus, it protects sellers because they get to keep the money if you cancel your transaction for any reason not outlined in your purchase agreement. This money goes into escrow. However, did you know that your lender may open a homeowner escrow account for you once the home sale is complete?

    Homeowner Escrow Accounts

    What Is It?

    In an escrow account, a third party holds and distributes money in a real estate transaction. In the case of a homeowner escrow account, the mortgage lender opens an escrow account that handles the disbursement of payments to the appropriate parties. This simplifies things a bit because then you only pay into one account each month to get your real estate needs taken care of.

    What Gets Paid Out of Escrow?

    These escrow accounts typically pay four things for you:

    • Principal on your mortgage loan
    • Interest on your mortgage loan
    • Property taxes
    • Homeowners’ insurance

    Property taxes tend to get paid three for four times a year. Your homeowners’ insurance comes due just once a year. With a fixed-rate loan, principal and interest remain steady throughout the life of the loan. But property taxes and homeowners’ insurance may vary from year to year. The loan servicer estimates the next year’s amount based on the current year’s payments. So, if you owed more taxes in the current year than the previous year, you may see an increase in your monthly payment. On the other hand, if you paid less, the surplus may come back to you in the form of a refund.

    Pros and Cons of a Homeowner Escrow Account

    On the plus side, you only need to make one payment to one account to cover your principal, interest, property taxes, and insurance. Instead of coming up with one lump sum when the taxes and insurance are due, these payments get split up into 12 smaller payments that you pay monthly over the course of a year. This also ensures that everything gets paid so that you don’t run into potential tax liens or judgments against you for non-payment. On the minus side, your monthly payment is higher to cover all of these expenses. And because the insurance and taxes change from year-to-year, your exact payment may vary slightly to accommodate these changes. But, again, this also means you don’t have to suddenly come up with one lump sum when these payments are due to their respective companies. That makes budgeting a little easier.

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