Escrow and additional home loan costs
About this video
A monthly mortgage payment can include principal and interest plus property taxes, homeowners insurance and private mortgage insurance (PMI). The video explains escrow, where the lender collects money for taxes and insurance and pays those bills on your behalf, and works out that escrow adds 250 + 125 + 105 = 480 dollars a month.
You'll be able to
- explain what an escrow account is in a mortgage.
- identify which parts of a mortgage payment go into escrow.
- explain why escrow helps both the borrower and the lender.
- add up the escrow costs in a monthly payment.
Key words
- Principal
- The part of your payment that pays down the amount you actually borrowed.
- Interest
- The extra money the lender charges you for borrowing.
- Escrow
- Money a lender holds on your behalf to pay bills like property taxes and insurance.
- Private mortgage insurance (PMI)
- Insurance that protects the lender if you can't pay, usually required when you put down less than 20%.
- Property taxes
- Taxes paid to the local county or government based on the value of your home.
- Homeowners insurance
- Insurance that pays if something bad happens to your house.
Transcript
- [Instructor] We're told your monthly mortgage payment includes the following costs. All right, this is the principal and interest. So this is what you're doing to the principal is what you're using to pay down the debt and then the interest is any debt on that.
Property taxes, homeowners insurance, and also PMI. So this is private mortgage insurance. So how much escrow, how much does escrow add to your monthly cost? We'll pause this video. Have a go at that before we do it together. Okay, so let's just remind ourselves what escrow even means.
In general, when someone says escrow, it's an account that's being held on the behalf of others, either to keep that money safe, to use it when something contractually needs to happen. When we're thinking about our mortgage payment, escrow is when your lender takes other stuff on your behalf in order to make sure that it gets paid.
Now you might say, why does that happen? Why is that in your interest? And why is that in the lender's interest? Well, it could be in your interest because it just simplifies your life. You just pay all of this right over here, and then that makes sure that your property taxes, your homeowner's insurance and your private mortgage insurance is all paid.
From a lender's point of view, they also care about that. Because imagine you have a mortgage and you have put 20% down, the lender has given you an 80% of the value of the house loan. They have a lot more at stake at that moment than you do. So if for whatever reason the property taxes aren't paid, or if you haven't paid for insurance and something bad were to happen to the house, that's going to hurt the lender.
And this mortgage insurance, this is usually for mortgages where there's less than 20% down. The lenders do this, and they make you pay that insurance in case you're not able to pay for the mortgage. And so then that protects their cost or protects their investment.
So when we think about the escrow, it's this money that they're holding on your behalf. There's oftentimes ways that you don't have to do this as part of your mortgage payment, where you could pay it separately. But as I said, sometimes it's more convenient and sometimes the lender really wants you to do it this way or they might even lower the interest rate if you do some of these things as part of the escrow.
If they're able to take these funds on your behalf, where did that come from? On your behalf and then pay it to the insurance company or to the county for you. So how much did escrow add to your monthly total? So 250 plus 125 is 375 plus 105 is 480. And we're done.
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