When you purchase a home, you may be required to obtain a mortgage to help finance the purchase. During this process, you may notice that your lender will escrow taxes as part of your mortgage payment. But why is this necessary? In this blog post, we will explore the reasons why lenders escrow taxes when you get a mortgage. Firstly, it's important to understand what escrow means. An escrow account is a separate account established by your lender to hold funds for specific expenses related to your mortgage, such as property taxes and homeowner's insurance. The lender will collect these funds from you as part of your monthly mortgage payment, and then use them to pay these expenses on your behalf when they come due.
When you purchase a home, you may be required to obtain a mortgage to help finance the purchase. During this process, you may notice that your lender will escrow taxes as part of your mortgage payment. But why is this necessary? In this blog post, we will explore the reasons why lenders escrow taxes when you get a mortgage. Firstly, it's important to understand what escrow means. An escrow account is a separate account established by your lender to hold funds for specific expenses related to your mortgage, such as property taxes and homeowner's insurance. The lender will collect these funds from you as part of your monthly mortgage payment, and then use them to pay these expenses on your behalf when they come due.
So, why do lenders require escrow for taxes? The main reason is to protect their investment in your property. Property taxes are a lien on the property, meaning that they are a legal claim against the property until they are paid in full. If you were to default on your property taxes, the taxing authority could place a tax lien on your property, which takes priority over the lender's mortgage. This means that if the property were to be sold or foreclosed upon, the tax lien would be paid off first, leaving the lender with less or no proceeds from the sale. By escrowing your taxes, the lender ensures that the property taxes are paid on time, and the tax lien does not take priority over the mortgage.
In addition, escrowing taxes provides convenience for homeowners. Instead of having to budget for property taxes separately and worry about making sure they are paid on time, the lender takes care of this for you. Your monthly mortgage payment includes your taxes and insurance, and the lender takes care of paying them on your behalf.
In conclusion, escrowing taxes is a common practice among mortgage lenders, and is done to protect their investment in your property, ensure that the property is not subject to tax liens or other legal issues, and provide convenience for homeowners. While it may add a small amount to your monthly mortgage payment, the peace of mind and protection it provides is well worth it.