What is an Escrow Account?
An escrow account is like a savings account established to pay your tax and insurance premiums when they come due. In order for the escrow account to have sufficient funds to cover future tax and insurance expenses, your monthly payment includes 1/12 or your combined tax and insurance premiums. Each month, the funds are accumulating in your escrow account. The amount of funds within the account at any given time is referred to as your “Escrow Balance”.
How is the Property Tax Escrow Calculated on a Newly Built Home?
Actual property taxes that are based on the lot and the home will not be determined by the county until after the home is complete and the County Assessor’s office has estimated the final value of the home. Therefore, at the time of closing on your long-term mortgage, the amount collected into your escrow account for property taxes will be based on an estimate. Depending upon the completion date of the home and the county’s schedule, it can be up to one year before the final taxes are assessed.
What to Expect when Taxes are Assessed
It is possible that the next tax bill will still be based on the value of the lot only without consideration of the home that is now built on the lot. Therefore, because the monthly tax escrow collected has been based on an estimated final value of the home, when property taxes are next due the escrow balance may be significantly higher than what is required to cover the actual taxes. After the escrow account pays the taxes, the lender may issue an escrow refund and then reduce the required monthly payment that is collected in the escrow account. If this happens, you can keep the amount refunded to you; however, do not let the lender reduce your monthly escrow account contributions. If you allow the lender to reduce the monthly payment, it is likely that you will have a significant escrow shortage the following year when actual lot and home taxes are assessed.
Establishing the Initial Escrow Balance
Because taxes from January 1st to December 31st are due in November of that same year, the closer your closing date is to November, the larger the initial tax escrow amount being collected will be. With the first year possibly being assessed based upon the lot only, a portion of the amount collected at closing may be refunded back to you after the first year’s taxes are paid. At the time of closing, the seller (or builder) will credit a prorated amount of taxes from January 1st until the funding date of the loan. However, the seller (or builder) will credit a prorated amount based on the value of the lot only. Therefore, you will be contributing a much higher prorated amount than the seller.
If you have any further questions regarding your escrow account, please let us know. My team and I are always here for you.