Home Building Guide: Understanding Escrow


Step 7b: Understanding the Escrow	Take One

• PITI

• local property taxes

• hazardous insurance

• other costs (PMI)

• estimating total costs

Return: Financing

Step7c: Getting Qualified

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Understanding the Escrow Payment: PITI

The total cost of a mortgage has four elements:
1. Principal
2. Interest
3. Taxes
4. Insurance
Principal represents the amount you borrow, which has to be repaid over time.
Interest is the cost that lenders charge for the use of their money during your repayment schedule.
Taxes is an assessment that local governments collect on property to pay for local services. Property tax rates will vary by location and can affect your total cost and affordability.
(Homeowners) Insurance will be required to replace the value of loan in the event of a disaster such as fire, earthquake, flood, etc.
These four cost components:

Principal + Interest + Taxes + Insurance (PITI)

= Total Cost of Your Mortgage Loan

Many times buyers ignore these additional costs when figuring how much of a home they can afford.
PITI is part of the formula that lenders use when calculating your affordability ratios.

see our discussion on affordability ratios

Understanding Escrow:

Property taxes and insurance costs must be collected and paid when they are due.
In most cases, lenders will make the collection by allocating each month to your mortgage payment the amount you need to pay for taxes and insurance.
These collections are placed in escrow, a depository account that the bank manages.

Your total monthly payment will include payments for real estate taxes, insurance, and Private Mortgage Insurance (PMI) and other items that are placed in escrow and used to pay taxes, insurance, PMI and other items on your behalf when they come due.
Note that the escrow portion of your monthly payment may increase or decrease, depending on the change of your taxes and insurance assessments.
If your mortgage does not have an escrow account, you will be required to pay your taxes and insurance separately and show proof of payment to your lender.

Local Property Taxes

Your county and city may levy taxes on your property. These taxes pay for government services such as schools, roads, police, and other community services.

Information on property tax use:
http://www.freeadvice.com/law/591us.htm
The annual tax is usually calculated as a percentage (factor) of your property's appraised market value. For example, an assessment may look like this:

$0.94 per $100 in appraised value

this calculates into a tax factor of 0.94% on the appraised value of your home

Contact your local community and county officials to determine your county and city tax factor.

Lookup county and city governments:
http://www.statelocalgov.net

Many of these local real estate taxes may qualify for tax deductions. Check with your tax advisor for more information.

Deductibility of real estate taxes:
http://www.irs.gov/formspubs/...

Publication 530: Tax Information for First-Time Homeowners:
http://www.irs.gov/formspubs/...

Download Publication 530:
http://www.irs.gov/pub/irs-pdf/p530.pdf

Download IRS1040, Schedule A: Itemized Deductions:
http://www.irs.gov/pub/irs-pdf/i1040sa.pdf
At your home closing, you will be required to prepay up to one year's cost of your property tax.

Then each month, your loan payment will include 1/12 of the annual property tax that will be deposited in your escrow account until the property tax payment is due.

Estimate your tax payments:

input will be used to calculate your total monthly payment below

County estimated tax factor (enter as .00XX):
City estimated tax factor:
Other estimated tax factor:

Appraised home market value:
jump to monthly payment

Hazardous Home Insurance

You may be required to carry hazardous insurance on your home in the event of a fire, flood, disaster, and any other natural disaster that destroys or partially destroys your home.
The insurance will protect your investment (and the lender's) and repair any damage that may occur. The annual premium may vary depending on your home area and location. You must provide proof of insurance before closing and settlement.

Looking for hazard insurance for your home?

Analyze insurance companies:
http://www.ambest.com/

Link to our Insurance page for links to online insurance brokers:
click here

At your closing, you may be required to prepay up to one year's cost of hazardous insurance.

Then each month your loan payment will include 1/12 of the annual hazard insurance premium to be deposited in your escrow account until payment is due.
Estimate your insurance costs:

input will be used to calculate your total monthly payment below:

Annual Cost of Insurance:
jump to monthly payment

Other Costs (PMI)

There may be other associated costs that may be included in your escrow payment such as Private Mortgage Insurance, tax liens if any, etc. Check with your real estate agent or your legal council to determine what other charges may apply.

What About Private Mortgage Insurance Costs (PMI):

Private Mortgage Insurance (PMI) is mortgage default insurance that is required for all conventional mortgage loans with less than a 20% down payment. It is designed to pay the lender a portion of the outstanding balance of a loan in the event the homeowner defaults.

for more information about PMI: http://www.privatemi.com/
If PMI is required as part of your loan, the initial annual premium will be included in your closing costs while your subsequent premiums (1/12th of your annual premium) will be included in your monthly mortgage payments and deposited in your escrow account.
You need to check with your lender to estimate your cost percentage for PMI if your down payment is less than 20%. Nationally, the average annual percentage is around 0.005 of your loan balance.
Estimate your PMI costs, if any:

input will be used to calculate your total monthly payment below

Annual Factor for PMI Insurance:
jump to monthly payment

Estimating Your Total Mortgage Cost

You can use the table below to estimate your total mortgage cost. Your monthly mortgage and escrow payment will be the total cost each month for your home purchase.

First, Calculate Your Monthly Mortgage Payment:

Enter the amount to be borrowed:

Enter the Number of Months to Repay: (1)

Enter Your Quoted Interest Rate %:

Monthly Mortgage Payment:

Next, Calculate Your Monthly Escrow Payment:

(calculate from the numbers above)

Estimated Taxes:		input tax factors
Estimated Insurance:		input insurance
Estimated PMI:		input PMI %

Monthly Payment for Escrow:

Your Total Monthly Payment:

Total Monthly Payment:

(1) These calculations are based upon the assumptions you entered. Please note that rounding error may make a small difference in calculations. The accuracy of the calculation and the circumstances which you may qualify may result in different calculations.

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Step 7b: Understanding the Escrow