What Is Escrow & MI?
If you're in the market to purchase a new home, you will hear your real estate agent and the mortgage lender talk about many different terms -- some of which you may not be familiar with. In real estate, the term "escrow" can have two different meanings. The abbreviation "MI" is short for mortgage insurance.
In addition to monthly mortgage payments, homeowners must also pay for other expenses including property taxes and homeowner's insurance. If you don't make these payments on time, the tax collector might place a lien against your property, which could lead to a tax foreclosure. Unpaid insurance premiums can leave you without coverage. If a disaster happens, it may result in a complete loss. Because the lender holds an interest in your property until the loan is paid in full, it wants to make sure the taxes and insurance are paid on time. An escrow account is created for you to pay these amounts each month in addition to your mortgage payment. When a payment is due, the lender makes it on your behalf with the funds in the account.
Escrow for Purchasing
Another type of escrow account is used when a property is being purchased. This type of escrow account is commonly used in some western states, such as California. Buyers are generally required to front money for deposits, appraisals and other fees before the deal is finalized. Both sides -- the buyer and seller -- can utilize a third-party escrow company to hold these funds until certain conditions are met. Once a certain condition is satisfied, the escrow company can distribute the funds as instructed. When there's an active deal on a property, it's often said to be "in escrow" before the loan closes.
If you put down less than the required down payment for your loan, your lender will likely want an insurance policy against your default. This is called mortgage insurance. Borrowers pay the premiums for the policy; however, it only protects the lender. Typically, the mortgage insurance fees are paid monthly with the escrow payments. Mortgage insurance is generally abbreviated to MI, or PMI for private mortgage insurance.
Not all lenders require borrowers to maintain an escrow account or pay mortgage insurance. Conventional lenders typically only require these if you have a down payment less than 20 percent of the total loan amount. Mortgage insurance might be waived if you're willing to pay a higher interest rate on the loan. If you are required to pay into escrow and have a mortgage insurance policy, it might be possible to cancel it later. Mortgage insurance fees can be stopped once the loan balance falls below 80 percent of the original. However government-sponsored loans, such as VA or FHA, will require an escrow and mortgage insurance for the duration of the loan. In order to cancel them, you would need to refinance the loan with a conventional lender.