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[ANSWERED] What are these escrow and interest amounts I'm seeing reappear in my mortgage statements?

executivedealer 2,785 491 September 3, 2015 at 08:42 PM
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Last Edited by executivedealer September 21, 2015 at 05:33 AM
Its been nearly a year (last november) since I bought my condo. I thought I paid off my escrow and it looks like it reared its head again. From what I am reading through other sources, this is for bank to have enough funds to pay tax & home owners insurance. Why does the bank deal with this? Shouldn't this be up to me to pay? My main concern is that the interest amount I am seeing. Can I just pay on my own and avoid interest?

DATE SEP 1 2015
Escrow Amount 76.46
AMOUNT $573.54
PRINCIPAL AMOUNT $362.37
INTEREST AMOUNT $211.17
BALANCE: $57,557.80

DATE August 03, 2015
Escrow Amount 76.46
AMOUNT $573.54
PRINCIPAL AMOUNT $361.06
INTEREST AMOUNT $212.48
BALANCE: $57,920.17

DATE July 01, 2015
Escrow Amount $0.00
AMOUNT $650.00
PRINCIPAL AMOUNT $650.00
INTEREST AMOUNT $0.00
BALANCE: $58,281.23

15 Comments

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#2
It is in the bank's interest for them to take care of your home owners insurance and taxes. Just think about the shock that some home owners would be in when they receive a bill from the county for $3,000. Americans are horrible savers, and if they didn't pay it, the county would put a lien on the house...and the bank loses. So the bank makes the Homeowner pay on a monthly basis to an escrow account. With that said, some banks do allow owners to pay their own taxes and insurance without escrow.

For your last question, good luck avoiding to pay interest. The only way to "avoid" paying the interest is to pay the payoff balance immediately, and even then you'll have to pay the accrued interest for the month as well. In your case it'll be in the vicinity of $58,500.
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#3
did you make 2 payments in july?was 650 an extra payment or?
interest is how much of the 573.64 the bank gets for lending you the money
if your payment is only 573.54 then you are paying taxes/escrow out of your own pocket.
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bulb save money by checking your insurance every 2 years (and not every 20)
#4
Escrow is part of servicing your loan. Escrow is never "paid off", it cycles itself each year. Not all loans or institutions have or require servicing. Some mortgage loans do require servicing and is part of the agreement, as it is in your case.

Every month you will pay into the escrow and the bank will pay your insurance and taxes each year. They will adjust your escrow amount as insurance or taxes go up (because let's face it, they won't go down). Escrow money is still your money but they are requiring you put it aside and have no access to it for the purposes of insurance and taxes.

Escrow protects the lending institution from people not properly covering their property and having catastrophic loss (insurance) and owing back taxes and having the IRS come after the property (taxes) which incurs a loss against the bank, (because the bank really has the bigger stake in the property).

With an escrow servicing account, you still have the option to shop insurance around so feel free to do that, but you are always required to notify your lender (if your insurance agent hasn't already done that for you).

Now remember that escrow is completely separate from your other parts of loan. It has no bearing on interest. You aren't paying interest on the escrow amount. A loan always has an interest rate and you pay accordingly. The interest amount is variable depending on your balance of the loan. As your loan is paid off you will see lower interest amounts each month. The interest is the bank's profit for putting up the money for the home.
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#5
To add to what the others have said, you often have the choice whether the company will pay your property taxes directly or mail you a check at the end of the year; the most common reason for the latter is so that you can choose to pay your property taxes in either December or January.

The reason for doing that is that if your mortgage interest and property taxes are your only big deductions, you might choose to pay the property taxes twice in one year (Jan + Dec) and itemize your taxes for the year, then not pay property taxes in the next year and take the standard deduction.
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#6
Quote from eekthecat View Post :
Escrow is part of servicing your loan. Escrow is never "paid off", it cycles itself each year. Not all loans or institutions have or require servicing. Some mortgage loans do require servicing and is part of the agreement, as it is in your case.

Every month you will pay into the escrow and the bank will pay your insurance and taxes each year. They will adjust your escrow amount as insurance or taxes go up (because let's face it, they won't go down). Escrow money is still your money but they are requiring you put it aside and have no access to it for the purposes of insurance and taxes.

Escrow protects the lending institution from people not properly covering their property and having catastrophic loss (insurance) and owing back taxes and having the IRS come after the property (taxes) which incurs a loss against the bank, (because the bank really has the bigger stake in the property).

With an escrow servicing account, you still have the option to shop insurance around so feel free to do that, but you are always required to notify your lender (if your insurance agent hasn't already done that for you).

Now remember that escrow is completely separate from your other parts of loan. It has no bearing on interest. You aren't paying interest on the escrow amount. A loan always has an interest rate and you pay accordingly. The interest amount is variable depending on your balance of the loan. As your loan is paid off you will see lower interest amounts each month. The interest is the bank's profit for putting up the money for the home.
I agree with you.
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#7
There've been several escrow threads in Finance before. Escrow is a separate account that you pay into which goes to cover taxes and insurance (home owners). Sometimes escrow is optional and it's up to the homeowner to pay it, sometimes it's required. As a lending institution, it's in their best interest to require escrow as then they are sure their investment (after all, they are lending you the $$ for the house) isn't going to run into legal troubles for non-payment of taxes or a major loss if you decided to not have insurance and the home burnt down.

That said, escrow accounts do gain some small amount of interest (think of it like a bank-managed savings account with a shit interest rate). some people prefer to manage T&HOI themselves claiming being able to get more interest but honestly IMHO it's not worth the hassle.

Word of warning however - SOME lenders that manage escrow accounts "pad" them by requiring you pay MORE than the required payment per month. You don't lose this money, but instead your escrow account just has an ever-growing positive balance. The idea is that things like insurance and taxes vary over time (usually grow) so the extra balance is a buffer for them. If this is the case for you, usually calling and asking to remove it will suffice. I've only had 2 mortgages but BOTH of them had this - after 7 years on the first one we had a +$1500 balance and after 4 years on the second we had a $1000 balance. I've since removed that buffer payment.
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#8
Quote from Dr. J View Post :
There've been several escrow threads in Finance before. Escrow is a separate account that you pay into which goes to cover taxes and insurance (home owners). Sometimes escrow is optional and it's up to the homeowner to pay it, sometimes it's required. As a lending institution, it's in their best interest to require escrow as then they are sure their investment (after all, they are lending you the $$ for the house) isn't going to run into legal troubles for non-payment of taxes or a major loss if you decided to not have insurance and the home burnt down.

That said, escrow accounts do gain some small amount of interest (think of it like a bank-managed savings account with a shit interest rate). some people prefer to manage T&HOI themselves claiming being able to get more interest but honestly IMHO it's not worth the hassle.

Word of warning however - SOME lenders that manage escrow accounts "pad" them by requiring you pay MORE than the required payment per month. You don't lose this money, but instead your escrow account just has an ever-growing positive balance. The idea is that things like insurance and taxes vary over time (usually grow) so the extra balance is a buffer for them. If this is the case for you, usually calling and asking to remove it will suffice. I've only had 2 mortgages but BOTH of them had this - after 7 years on the first one we had a +$1500 balance and after 4 years on the second we had a $1000 balance. I've since removed that buffer payment.
so has the Law
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#9
Either the OP had a brainfart before making this thread or he's trolling. How do you get into a mortgage and not know what Escrow is or understand how interest and payments work?
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#10
you're thinking of people in your circle. Many that don't understand escrow or PI+TI
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#11
Quote from stufine View Post :
you're thinking of people in your circle. Many that don't understand escrow or PI+TI
Well that's a PITI Stick Out Tongue
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#12
Quote from executivedealer View Post :
Its been nearly a year (last november) since I bought my condo. I thought I paid off my escrow and it looks like it reared its head again. From what I am reading through other sources, this is for bank to have enough funds to pay tax & home owners insurance. Why does the bank deal with this? Shouldn't this be up to me to pay? My main concern is that the interest amount I am seeing. Can I just pay on my own and avoid interest?

DATE SEP 1 2015
Escrow Amount 76.46
AMOUNT $573.54
PRINCIPAL AMOUNT $362.37
INTEREST AMOUNT $211.17
BALANCE: $57,557.80
Any loan payment consists of principal and interest; your mortgage payment has escrow as well, due to the nature of the linked asset.

Principal is the amount that is applied to your outstanding loan balance. Interest is the cost of having the loan. The higher the interest rate and/or the higher the balance, the higher the proportion of your payment that goes towards interest. This is due to the amortization of the loan (that is, the loan repayment is broken down into 360 equally-sized, regularly-paid amounts), and so most of your payment at the beginning of the loan actually goes to interest. The only way to avoid paying interest is to not have a mortgage. Your probably paid twice in July, or somehow designated that payment to be "principal only", thus why the whole payment was applied to the outstanding balance. You may want to double check that you are not behind in your payments by 1 month.

Escrow is an account set up to hold funds that are used to pay for property taxes, home insurance, and mortgage insurance (if applicable). These payments can be several thousand dollars, so mortgage companies require the homeowner to contribute a smaller amount of each month towards those payments, to avoid "sticker shock" when they need to be paid. You pay into this escrow account every month, and the mortgage company pays out as needed. The terms of your mortgage probably require you to have escrow. It is a nice thing, as shortfalls (due to increases in taxes) are absorbed gradually and spread out over the year.

Quote from boingyman View Post :
Either the OP had a brainfart before making this thread or he's trolling. How do you get into a mortgage and not know what Escrow is or understand how interest and payments work?
It is a bit surprising, yeah, that the OP is paying $650 a month to the bank and doesn't understand what it's for...
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Last edited by mmathis September 8, 2015 at 10:42 AM
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#13
When I was researching everything I possibly could before making my home purchase, I found out what it was during that time to justify it. I just have horrible memory. thanks all.
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#14
well that makes me shake my head just as much as the first post
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#15
Quote from executivedealer View Post :
When I was researching everything I possibly could before making my home purchase, I found out what it was during that time to justify it. I just have horrible memory. thanks all.

For future reference, if you refi this mortgage or get a new one, many lenders offer option to take loan "out of escrow" and let you handle taxes/insurance yourself. However, they may charge you extra for this - either a flat $ at close or, worse, additional 0.125%-0.25% on the annual rate. The latter is to be avoided at all costs.


Even for your existing loan, after 24 months of payment, contact the lender to ask if they will take the loan out of escrow. I've successfully down this three times with three different lenders at no additional cost.


As others have pointed out, lenders require escrow to ensure no (financial) lien is put on the property they are financing. Demonstrating 24 months of cash flow capability (and are not a sub-prime loan) helps negate the need for this.
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