Half of homeowners with an escrow account don't fully understand how it works, according to LERETA.
Yahoo Finance Senior Reporter Claire Boston joins Wealth to explain what an escrow account is, who has one, and why payments are rising for many homeowners.
To watch more expert insights and analysis on the latest market action, check out more Wealth here.
New study reveals only half of respondents who have an escrow account with their mortgage completely understand how the account works. So we're going to break it down with senior housing reporter Claire Boston. Claire, let's just demystify what this is. What is an escrow account and who needs to have one?
Hi, Brad. So an escrow account is a special account that is set up, um, for you to set aside payments for your taxes and, um, insurance associated with owning a home. Um, escrow accounts are very, very common and around 80% of people have them. Anyone who did not put 20% down and has a conventional mortgage has an escrow account. And even some of those people who did put that big money down, they like the escrow account because it allows them to set aside a little bit every month for those, you know, big tax bills that we see, you know, typically year end or often at the beginning of the year.
Now I can't lie. Your own headline alone sounds kind of concerning that half of these survey respondents who have this account say they don't really know how to use it or completely understand it in entirety.
Yeah, it is a little concerning. Um, you know, one thing that I've heard is kind of people when you're buying a home, you just are signing so much paperwork, you may not be looking at it all. Um, but the concerning thing about not knowing what your escrow is doing is your escrow payment can go up, and that will happen if your insurance goes up, if your taxes go up. And that can really catch people by surprise, especially in an environment like this, where a lot of people are really stretched, the monthly payment they're making on their home can be a lot of money. Uh, so if you get this surprise bill that, you know, suddenly your escrow is going to go up every month by say $100, that can be really difficult for like a normal consumer.
Relative to perhaps historical averages, are a lot of people seeing their escrow payments go up right now?
Yes, it has become a bigger problem in recent years, and that is just a reflection of home prices, um, in recent years. We have seen so much home price appreciation that is causing local tax assessors to assess at that higher rate. So your taxes are going to be higher. And then we're also seeing just in terms of insurance, insurance costs are really rising in much of this country as we see more natural disasters. And so, you know, not understanding escrow can be a really big issue for how people plan things monthly. Doesn't mean your mortgage went up, you're still paying the same principal and interest, but it is for those taxes and that insurance.
Claire, thanks so much for breaking this down for us.
Thank you.
