Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays.
I recently received an e-mail from a reader who is interested in paying off her mortgage early. In it, she asked the following:
Is it better to pay money monthly that is applied to your escrow or your principal? I would like to pay the equivalent of one extra mortgage payment a year, but I’m not sure where to apply it.
The short answer is that you want the extra payments to apply to your mortgage principal — that’s the amount that you still owe the lender. In most cases, your lender will automatically apply any overage to your mortgage principal. That’s not always the case, however, so it’s best to check with them to be sure.
The longer answer is that your monthly mortgage payment likely consists of four parts: principal, interest, taxes, and insurance. This is where the acronym PITI comes from. The reason that your lender collects taxes and insurance is that they want to protect their investment (your home) from both disaster and tax complications by making 100% sure that both bills get paid.
What the heck is escrow?
So where does escrow come in? Well… The term escrow refers to a legal arrangement in which a third-party takes possession of money or property until certain obligations have been met. In the real estate world, the “extra” funds that your lender collects are placed in an escrow account until your tax and/or insurance bills come due. At that point, the funds are disbursed to cover your obligations.
More generally, escrow services are often used to reduce risk in business deals when the two parties don’t fully trust each other. For example, if a particularly valuable asset is being sold, the buyer will often transfer their money to an escrow agent instead of paying the seller directly. The escrow agent will then hold the funds until the asset has been transferred, at which point the seller will get paid.
- How to Become a Millionaire
- How to Get Out of Debt
- The Best Dollars I've Ever Spent
- How Our Estate Plan is Structured
- How We Paid Our Mortgage In Less than 10 Years
- Money Making Ideas
- How to Manage Your Asset Allocation with Multiple Accounts
- Consumption Smoothing - Save While the Saving's Good
- How to Save on Groceries
- How Much Life Insurance Do You Need?
- Eleven Great Books About Money
- Dave Ramsey is Bad at Math (693)
- Dish Network Customer Service SUCKS (537)
- $8,000 Homebuyer Tax Credit (429)
- Pay Off Mortgage Early or Invest? (424)
- How to Claim the First-Time Homebuyer Tax Credit (352)
- Termite Control: Sentricon vs. Termidor (330)
- How Much Should You Pay a Babysitter? (292)
- Ethanol Blended Gas = Lower Mileage? (273)
- Reduced Credit Limits? Share Your Experience (256)
- $15,000 Homebuyer Tax Credit (242)
- Buying Furniture off the Back of a Truck (237)
- Will Mac OS X Lion Kill Quicken 2007? (191)