Real Estate Investing
Why Your Escrow Account had a Mortgage Payment Increase: First Time Home Buyers and New Real Estate Investor Tips

Why Your Escrow Account had a Mortgage Payment Increase: First Time Home Buyers and New Real Estate Investor Tips

As a first time homebuyer or new real estate investor, the term escrow account will come up. However, what is an escrow account and how does it work? Many new home owners or those getting into real estate investing, who are funding their purchase with a loan, will have an escrow account. However, they often don’t know what to expect. Additionally, there is confusion when there is a mortgage payment increase even when they have a fixed rate. Whether you are a first time home buyer or want to get into real estate investing, knowing how an escrow account works is crucial.

What is an escrow account?

If you are purchasing a home or real estate investing with a loan, an escrow account may be used or required. An escrow account is a money management account held by a third party. Simply put, escrow is a neutral third party that holds assets (usually money) during a transaction between two parties. In real estate, this typically involves the new home owners (buyer)or real estate investor, seller, and sometimes lenders. When you’re buying a property, you’ll often hear the term “being in escrow,” which means the period between the offer being accepted and the deal closing. However, an escrow account will be used to collect the mortgage payment, which is then used to pay the lender, property taxes and insurance. This is great for the first time home buyer or those getting into real estate investing, because it is one less thing to manage on your own.

escrow account calculation with a house

How does an escrow account work?

First, there are a few ways that an escrow account is put to use by the new home owners or real estate investors. An account will be opened to facilitate the purchase of the home or property. Additionally, it is also used in real estate investing. As a result, it will ensure that each party fulfills their part of the contract. But it is managed through a neutral third party. This is how the process usually goes:

Escrow account when purchasing

  • Opening Escrow: When the new home owners and the seller agree on the terms of the sale, an escrow account with a neutral third-party escrow agent or company is opened.
  • Deposit: The buyer deposits their earnest money into the escrow account. Earnest money is a good faith deposit showing your commitment to the purchase.
  • Title Search and Contingencies: While in escrow, you want to conduct your due diligence is, to include a title search to ensure the property’s ownership is clear and free of any liens. Contingencies, such as home inspections or financing, will be addressed during this time.
  • Closing Process: Once all contingencies are met, the deal will move to closing. This involves finalizing paperwork, transferring funds, and officially transferring ownership of the property from the seller to the buyer.
  • Distribution of Funds: The escrow company ensures to distribute the funds correctly, to include paying off any outstanding debts or liens on the property and will transfer the remaining balance to the new home owners.

Escrow account for mortgage payments

Secondly, an escrow account will be used to automatically disburse payments to the lender, property taxes, and insurance company. Then, the escrow company collects the funds as a mortgage payment, based off their closing disclosure. However, many first time home buyers and real estate investors are unaware that there may be a mortgage payment increase in the future. This is when you hear the horror stories of mortgage payment increase from $100 to even $1000! Matter-of-fact, there was a Tiktok trend where first time home buyers shared their stories. Additionally, new real estate investors can also be surprised with a mortgage payment increase when they first start real estate investing.

woman reading her mortgage payment increase mail notification

Why did I get a mortgage payment increase?

Many first time homebuyers or new real estate investors are not told about the potential mortgage payment increase. As a result, they get a horrible surprise within the year and throughout of higher mortgage payment. This is a punch in the gut for new home owners or anyone in the real estate investing game. Why does this happen? Here are a few reasons that can cause a mortgage payment increase.

  • Interest Rate Changes: If you have a variable interest rate, then your mortgage payment will increase if your interest rate increases.
  • Property Taxes: Property taxes may also cause a mortgage payment increase if the taxes are calculated incorrectly or if your property taxes increase. It is normal for that to happen when you purchase a home or property, as the property value increased. This is important for a first time home buyer or real estate investor to keep in mind.
  • Escrow error: A mortgage payment may increase if the escrow company did not calculate
  • Escrow Services: The range of services offered by escrow companies has expanded to include not only real estate transactions but also other types of financial transactions, such as online purchases or business acquisitions.

Planning for increases as a first time home buyer or real estate investor

Furthermore, as a first time home buyer or real estate investors, you want to ensure you try to do your due diligence. Knowing what to expect as your mortgage or other future costs, is crucial for new home owners. Here are a few tips to help you plan for the unexpected:

  • Property Taxes: First, ask for previous tax statements or ask for them at the county’s office. They can also give you the rate for your property. Then, you can calculate an estimate, based on what the home is valued at sale, to help you plan for the future. Be sure to ask if you will need to pay that year’s taxes or will it be covered as a closing cost. Note: Some counties can take a year or two to recalculate your taxes. (Mine took two years to catch up and it was a huge surprise at the increase!)
  • Understand your Loan: Equally important, is to ensure that you understand all aspects of your loan clearly. This is disclosed in your Closing Disclosure (CD). Ask for clarification on anything that you have questions on or unsure what they mean.
  • Buy under budget: Again, due to the home selling at a higher value, increases in costs is expected. Therefore, ensure you buy a home that is in the middle of your budget. Avoid buying at the top of your budget, as it gives you little room for the unexpected.
  • Build an emergency fund: In addition, as a new home owners, create an emergency fund for the unexpected. You can plan for the unexpected but it can still catch you off guard. Start setting money aside for those surprise costs. You can do this with a high yields savings account*. These accounts, like Upgrade*, can give a return of around 5%, which is waaaay better than a regular savings account.
first time homebuyers couple in their living room. New home owners.

Whether you are a first time home buyer or getting into real estate investing, understanding how an escrow works is important. Escrow plays a vital role in real estate transactions, providing a secure and neutral environment for buyers and sellers to conduct business. Furthermore, by understanding how escrow works and staying informed about any changes in regulations or practices, you can navigate the real estate market with confidence. So, the next time you hear the term “escrow,” you’ll know exactly what it means and how it impacts your journey in real estate investing. Happy investing!

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