Mortgage Brokers. The only people in the real estate & financing business who know less about how it works than real estate agents.
1. When you buy a house you put down some cash (your down payment) and borrow the money from a mortgage lender for the rest. You have to pay that back over a period of years in monthly payments which are composed of interest and a portion of the principal. On loans with less than 20% down (and sometimes more) the mortgage holder will usually also require that you pay 1 month's worth of taxes, homeowners insurance and/or mortgage insurance (called escrows) along with each monthly loan payment. Your total monthly payment is the loan payment itself, plus whatever escrows the mortgage holder requires.
For example:
Principal and Interest (loan payment): 1,000.00
1/12 annual property taxes: 300.00
1/12 annual Homeowner's Insurance: 80.00
PMI (mortgage insurance): 50.00
Total Monthly payment: 1,430.00
This will vary a lot depending on the lender, the type of program, the amount of your down payment, the size of the loan and endless other things. All of it is supposed to be disclosed to you
in writing before you are obligated to accept the loan.
2. The mortgage holder (or servicer if they are different) deposits the escrows into a separate account and pays the bills for taxes, insurance, etc., as they come in. They normally collect a little extra to cover you when those things go up each year (as they usually do). You should get a statement at the end of each year showing how much they paid out on your behalf. The amount they collect will change from time to time as the various charges change so you'll see your monthly payment go up accordingly, at least once a year, sometimes more.
3. The lender isn't doing this for your benefit. They are protecting themselves by making sure the taxes and insurance get paid to protect the property and their interest in it. All of this is heavily regulated by State and Federal laws so complex and bizarre that nobody really understands how they work, including the politicians who enact them and the bureaucrats who enforce them.
4. Good News: When you pay everything at once in a monthly payment it's comparatively easy to budget and you don't need to come up with big chunks of money for taxes and insurance bills when they come in.
Bad News: You are paying all those things long before they are actually due, with money that could have been sitting in your savings or investment account earning interest for you. (The lender's escrow account pays interest but it's chicken feed even compared to a regular savings account.)
See how easy that was?
