Escrow is an account managed by your mortgage servicer that holds funds for property taxes and homeowners insurance. A portion of each monthly payment goes into escrow so these bills are paid on time.
When you have an escrow account, your monthly mortgage payment includes more than just principal and interest. The lender collects an additional amount each month to cover property taxes and homeowners insurance premiums. When those bills come due, the servicer pays them from the escrow account on your behalf.
Lenders require escrow accounts to protect their investment in your property. If property taxes go unpaid, the government can place a lien on the home. If insurance lapses and the home is damaged, both you and the lender lose. Escrow ensures these critical payments are never missed.
Escrow accounts are reviewed annually. If your property taxes or insurance premiums change, your escrow payment adjusts accordingly. This means your total monthly mortgage payment can increase or decrease even with a fixed-rate loan. You may also receive a refund if the account has a surplus, or a notice of shortage if more funds are needed.
Closing costs are the fees and expenses you pay when finalizing a mortgage, typically ranging from 2% to 5% of the loan amount. They include lender fees, appraisal costs, title insurance, and government recording charges.
PMI (Private Mortgage Insurance)Private mortgage insurance is a monthly premium that protects the lender if you default on your loan. PMI is typically required on conventional mortgages when your down payment is less than 20%.
PrincipalPrincipal is the original amount of money you borrowed for your mortgage, or the remaining balance you still owe. Each monthly payment reduces the principal by a small amount.
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