An escrow account is a type of legal holding account that is funded each month as part of your total monthly payment. Lenders use it to make property tax and insurance payments on your behalf, as well as other items such as mortgage insurance and flood insurance. Being “in escrow” means that certain objects (money or goods) cannot be released until both parties meet all the conditions. Escrow accounts are more related to the monthly mortgage payment than to the initial home purchase. When you borrow money from a bank or direct mortgage lender, you'll usually receive an escrow account.
In this account, the lender will deposit the portion of the monthly mortgage payment that covers taxes and insurance premiums. By collecting a fraction of those annual costs each month, an escrow account reduces the risk of falling behind in meeting your obligations to the government or to your insurance company. It can also be used to pay future property taxes and insurance costs for a home you already own, depending on your lender. When you complete the transaction, the collateral you deposit as collateral will go toward the down payment on the home. If the seller accepts your offer, the escrow will be held in an escrow account for safekeeping until you close the purchase of the home or cancel the transaction. These may include fees paid to the realtor, mortgage interest paid in advance to the lender, registration fees to the county records office, and escrow agent fees. It may be tempting to run out of an escrow account because it could mean a lower monthly mortgage payment, but escrow can give you peace of mind by eliminating your responsibility to make sure those important bills are paid. The escrow company not only manages the buyer's deposit, but it may also be responsible for keeping the deed and other documents related to the sale of the home.
The lender or mortgage servicer holds these funds in an escrow account and makes payments on behalf of the homeowner when due. Depending on the type of loan and its details, you may not have the option of giving up an escrow account. When your tax bills and insurance premiums are due, the mortgage servicer will ensure that those bills are paid on time at all times. Once your property taxes and home insurance premiums are due, your loan servicer will use the balance in your account to pay them off. In regard to the latter, the mortgage lender requires some homebuyers to have an escrow account; others may choose to open one through their mortgage servicer. Loans guaranteed by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) also require you to have an escrow account for these expenses.
When it's time to pay your taxes and insurance bills, your mortgage lender will withdraw the funds from the escrow account and pay them off. Mortgage lenders require escrow accounts from borrowers to minimize their risk that you won't meet your financial obligations as a homeowner. Learn more about what mortgage points are and determine if “buying points” is a good option for you. Costs may include, but are not limited to, real estate taxes, insurance premiums, and private mortgage insurance. An escrow account can give you peace of mind by eliminating your responsibility to make sure those important bills are paid. It can also be used both in advance and throughout the term of your loan for future property taxes and insurance costs for a home you already own.
