with Russ Strazzella

Today we’re going to be talking about escrows and impounds. These are monthly fees that you’re going to pay in addition to your mortgage payment, so that at the end of the year, when certain bills become due without you having to do anything, your mortgage lender will then take the money you’re spending every month and pay those bills for you. The biggest bills is often property taxes and insurance.

Let’s start with what makes a monthly payment. Principal, interests, taxes and insurance.

Now, principal and interest are the two numbers that won’t ever change for the life of your mortgage. Let’s just say, for example, you as a new home buyer, have a $1,500 a month payment for your principal and interest (that’s your loan and service charges).

Your taxes and insurance are going to be variable. It depends on your insurance coverage and the value of the home. Those are the two things you’re going to impound or pay a little bit every month.

So let’s just say, for the sake of argument, your taxes on your house are $6,000 a year, and your insurance is $1,200 a year. Those would break out into $500 a month and $100 a month.

So on top of your principal and interest, you’re also going to pay, in one large monthly payment, an additional $600 towards these. And at the end of the year, a check for your taxes will go to your City or County, and a check for your insurance will go to your homeowners insurance company.

Grand total, you’re going to have a payment, $2,100 a month in this example. Essentially, it saves you from forgetting to make these two very important payments. And that’s escrows and impounds.

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