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What are Escrow Taxes?

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  • Written By: Marsha A. Tisdale
  • Edited By: J.T. Gale
  • Last Modified Date: 19 January 2020
  • Copyright Protected:
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    Conjecture Corporation
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Escrow taxes are funds that are set aside by a third party to pay property taxes and insurance on behalf of the property owner. Some mortgage companies require an escrow amount to be included in the monthly mortgage payment. Property owners then pay a monthly amount that is held by the mortgage company in an escrow account until the property tax or insurance comes due. It is then paid by the mortgage company at that time.

An escrow officer is a trained professional that works with a buyer or seller and the financial institution that is loaning money on a property transaction. When purchasing a home, a buyer typically will provide an earnest money deposit in addition to the offer made on the house. That money will remain in escrow where it is kept by the neutral third party until the sale is complete.

When a lender or mortgage company sets up the loan, they calculate the monthly payment based on the principal, interest, taxes, and insurance that will come from the payment. Principal and interest goes to the mortgage company. The property tax and insurance portion of the payment remains in an account for escrow taxes until the property tax and insurance are due.

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Prior to purchasing house, a buyer can anticipate the amount that would be included in an escrow taxes payment by using an escrow calculator. These can be found by typing "escrow calculator" into any search engine on the Internet. Yearly real estate taxes and the cost of insurance are required to determine what the monthly required escrow payment would be.

A home owner may want to refinance their home to get a better interest rate and lower monthly payments. The longer the time is for the loan the less the monthly payment. A longer loan period, however, will result in a higher total price that will be paid due to the interest paid. Finding a lower interest rate will also lower the monthly payment. It is possible to get lower payments and yet keep the period the same length. Interest rates will depend on past credit history.

The benefit of escrow taxes is the assurance that the property taxes will be paid on time. A disadvantage of this method is that it is more money each month than if you only paid principal and interest. If the money is placed in an interest-bearing account instead of used in establishing an escrow account, then the amount will earn interest for the individual rather than the mortgage company.

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