Your mortgage is undoubtedly one of your biggest and most important bills. Many mortgage companies include payments to the escrow payment with your mortgage, so you may not realize it’s there. For lenders that bill separately, you may have the option to put any money over the amount of your payment on either your escrow or the mortgage principal. It’s up to you what you pay first, but make sure you know the facts before you decide. This post will help you do so.
What Is the Principal?
The principal of your mortgage is the actual loan amount. Much of what you pay for the first several years is interest. If you make a payment that’s over what you owe for the month, you can apply the extra to the principal amount. This lowers the amount you owe, which will lessen the amount of interest you are required to pay over the lifetime of your mortgage. Paying a little extra each month and directing it toward the principal can significantly shorten the length of your loan if you maintain the higher payments.
What Is Escrow?
The escrow account is separate from your actual mortgage payment. An escrow account holds funds that have been set aside for additional expenses such as property taxes, homeowners’ insurance, or any fees that may need to be paid at a later date. While you can add money to your escrow account at any time, it won’t do anything toward lowering the actual amount of the principal. Your escrow funds may sit in the account for a long time without ever being touched.
Which Is More Important?
Both the principal and your escrow account are important. It’s a good idea to pay money into your escrow account each month, but if you want to pay down your mortgage, you will need to pay extra money on your principal. The more you pay on the principal, the faster your loan will be paid off. Choosing which one to make an additional payment on is up to you. Take the time to consider which one is more beneficial, and then make your payments accordingly.
Determine Your Best Interests and Pay According to Your Needs
There are benefits to paying extra on both accounts. Padding your escrow account is a good idea if you have an adjustable-rate mortgage that will allow your interest rate to go up. On the other hand, paying on your principal will pay off your loan much quicker and build equity in your home. Both have advantages. It’s up to you to determine which one best suits your needs and then pay accordingly.
Understanding how your mortgage and escrow accounts work is a must if you plan on managing your money wisely. Our professionals at Brighton Escrow, Inc. are available to discuss your options with you and help you make the right decision. Call today to talk to one of our professionals and get all the answers you need. Our team has years of experience and can guide you through the escrow process.
FAQs
If you're stuck between paying down the balance on the principal or escrow on your mortgage, always go with the principal first.
Should I pay extra on my mortgage or escrow? ›
Which Is More Important? Both the principal and your escrow account are important. It's a good idea to pay money into your escrow account each month, but if you want to pay down your mortgage, you will need to pay extra money on your principal. The more you pay on the principal, the faster your loan will be paid off.
Will my mortgage payment go down if I pay escrow? ›
If your mortgage company is collecting too much for your homeowners insurance, you may be able to request a reevaluation of your escrow account. A decrease in your monthly escrow amount would end up decreasing your total monthly mortgage payment.
Do I pay mortgage during escrow? ›
Yes, house payments do need to be kept current during escrow, to preserve your credit, and to avoid late charges. Good communication with your Escrow Officer is important. During escrow, a payoff statement will be obtained by escrow from your Mortgage Company.
Can I add escrow to my mortgage later? ›
If you opt to add an escrow account later in your mortgage term, it may involve additional fees to set up and manage the account. Fortunately, the cost to set up and manage the account shouldn't exceed one-sixth of your annual escrow payments.
What happens if I pay an extra $200 a month on my mortgage? ›
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
What happens if I pay an extra $1000 a month on my mortgage? ›
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
Why did my escrow go up $400? ›
Escrow Changes
Changes in the price of your property taxes or homeowners insurance are among the most common causes of a mortgage payment increase. These funds are traditionally held in an escrow account connected with your mortgage payment.
Is it better to have escrow or not? ›
Escrow accounts can provide peace of mind and convenience as they reduce the burden of having to pay your homeowners insurance premiums and property taxes yourself. Another benefit is that you can still shop around with different insurers whenever you like and save money by changing your policy.
Is it better to pay your escrow shortage in full? ›
By paying your escrow shortage in full, you may have peace of mind that you eliminated the shortage and brought your escrow account back into balance.
Who owns the money in an escrow account? The buyer in a transaction owns the money held in escrow. This is because the escrow agent only has the money in trust. The ownership of the money is transferred to the seller once the transaction's obligations are met.
Do you get escrow money back? ›
You may also receive an escrow refund when: You deposit more in your escrow account with your earnest money or down payment than is ultimately needed to cover closing costs. In that event, you could receive a refund within a short time after your closing date.
Can I remove escrow from my mortgage? ›
To have your escrow account removed from your mortgage, you'll likely need: Less than 80% LTV on a conventional loan (no more than 90% LTV for a VA loan) No delinquencies within the last year and – depending on your investor – no 60-day delinquencies within the last 2 years. No loan modifications.
What are the disadvantages of escrow? ›
Cons
- You might pay fees for the escrow account opening and management.
- Your mortgage payments include taxes and insurance, so getting behind in your mortgage payments could also leave you delinquent on your taxes and insurance.
- Prepaying mortgage and interest reduces cash reserves you could put toward another use.
If your bank determines that there will not be sufficient funds in your mortgage escrow account, it may raise your payment by the amount of the shortage. The bank may offer you the choice to repay the amount in one lump sum or spread the payments over a 12-month period.
Why did my mortgage go up $300? ›
A higher monthly mortgage payment doesn't necessarily mean you've done anything wrong. Mortgage payments can change even when the homeowner pays on time. Changes in your escrow account, property taxes, homeowners insurance or interest rate can increase the dollar amount of your mortgage loan payment.
Will my escrow payment go down if I pay extra? ›
If it's higher than projected, you can make an additional escrow payment online to help lower or prevent a shortage. My escrow payment went down, so my monthly payment is lower.
Is it smart to pay extra on your mortgage? ›
Since your interest is calculated on your remaining loan balance, making additional principal payments every month will significantly reduce your interest payments over the life of the loan.
Is it smart to pay your escrow shortage in full? ›
By paying your escrow shortage in full, you may have peace of mind that you eliminated the shortage and brought your escrow account back into balance.
Do extra payments automatically go to principal? ›
The key is to specify to your lender that you want your extra payments to be applied to your principal. If you don't make this clear, you may find the extra payment going toward the interest you owe rather than the principal.
