Most people are of the opinion that their house payment is calculated only by the amount of the loan they take out in order to purchase the home. Obviously, your monthly house payment will reflect the amount that you and the mortgage lender agreed upon. In all likelihood some other costs too will be included in the payment you make each month.They are part of what are called to as escrow payment.
Putting Expenses in Escrow
Your payment, apart from your monthly payment toward your mortgage loan, will also include expenses that are included in escrow. Other items included in escrow are your house insurance as well as your property tax amount. PMI or Private Mortgage Insurance will also be included in your escrow if you are required to carry the former.
Your house insurance protects your property and your belongings. The property taxes, on the other hand, the taxes you need to pay on home each year. It is in the best interest of the mortgage lender to include these costs in the monthly house payment because your home can be taken from you if you fail to pay your property taxes. Similarly, if your home is destroyed, your mortgage lender may not be able to recover its investment if you do not have house insurance in place. Obviously, having these costs included in escrow is beneficial to you as well because you only have to make one regular payment rather than three.
What are the Drawbacks to Using Escrow Payments?
While most homeowners find escrow payments to be convenient, there are potential drawbacks to this payment method. For example, the amount of your property taxes and your homeowner’s insurance for the next year are estimated by the mortgage lender based upon past costs as well as other factors that may impact the costs. Your monthly payment is then adjusted to show off these estimates, or you may also be provided with the choice to send the difference to your lender at one time.
In either case, you will be experiencing an unexpected extra expense. Of course, you most probably would have faced this added expenditure anyway, unless the mortgage lender was severely off base with its estimates. At the same time, if you overpay for these expenses throughout the year, you can get a nice check reimbursing you for the overpayment at the end of the year.
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