You’ve probably heard of escrow accounts and have a vague idea of what they are. It’s a fairly simple concept. An escrow account acts as a savings account that Caliber, as your mortgage servicer, manages for you. A portion of each mortgage payment will go into your escrow account to cover your estimated real estate taxes and insurance premiums so that when those payments come due, you already have the cash on hand to pay them.
When you close on your loan, Caliber will collect funds to open an escrow account. Each month, a portion of your mortgage payment will go into your escrow account, and we will use the escrow account to pay your taxes and home insurance bills. This spreads the expenses over 12 months, making it easier on your budget. And since we’re making the payments, you won’t have to worry about remembering when they’re due.
Your escrow account will cover property taxes and homeowners' insurance. It will also cover flood and mortgage insurance if those are required. It does not cover things like utility bills, homeowner association dues, supplemental tax bills or personal property insurance.
Certain types of loans, including FHA loans, require escrow accounts. Government-backed mortgages, like FHA and USDA loans, require an escrow account. Conventional loans and other programs may or may not call for an escrow account.
Even if an escrow account isn’t necessary, it can still be a good idea. If you don’t use an escrow account, you’ll be responsible for paying property taxes and insurance yourself, so you’ll need to handle budgeting and paying them on time. When you have an escrow account, Caliber, as your lender or service provider, will manage the payments and budgeting for you, and you’ll get to pay your real estate taxes and insurance payments a little each month, instead of a larger lump sum all at once.
Caliber will estimate the amount that will have to be paid for your real estate tax and homeowners' insurance bills. This estimate, provided during closing, is based on either the taxing authority and insurance company or previous tax and insurance bills. Each year, we’ll analyze your account to make sure you’re paying the right amount to maintain the minimum required balance. Because it’s based on an estimate, the amount can be overestimated or underestimated. This is called an escrow overage or shortage.
If there’s an overage, you’ll get your money back. If there’s a shortage, you usually have a couple of options for paying the remainder. You could pay the full shortage upfront or pay the shortage over a period of 12 months, along with your regular payments. However, some types of loans may not allow for this second option.
When you make an offer on a home, you’ll typically include a personal check for 1-2% of the purchase price. This is called “earnest money,” and shows the seller of the home that you’re a serious buyer. The check won’t be deposited until the seller accepts your offer.
If your offer is rejected, you’ll get your check back. If the offer is accepted, the money will go into an escrow account to be held until it’s time to close. At closing, the money will be used toward your down payment and closing costs.* At this stage, the closing escrow account is basically a secure place to hold your money until all paperwork is finished and the home is officially yours.
To learn other basics about escrow accounts, visit this page. If you have other questions, contact a Caliber Loan Consultant to discuss your situation in more detail.
*This is separate from taxes and your insurance escrow.