What is an Escrow Account?
Escrow is a concept that can confuse even the most savvy home buyers. Here are answers to the most frequently asked questions about escrow accounts.
1. What is an escrow account?
An escrow account is used by your lender to hold money that you've pre-paid toward your annual property taxes and homeowner's insurance. Your lender uses this money to pay these bills for you when they're due. Using an escrow account guarantees that these payments are made on time — which protects both you and the bank's investment in your home.
2. How does an escrow account work?
An escrow account works in tandem with your mortgage payment. If you have an escrow account, you make one monthly payment to your mortgage company that covers the home loan monthly principal and interest, homeowner's insurance, property taxes, and private mortgage insurance (PMI), if you have it. The monthly escrow payment is approximately one-twelfth of your yearly tax and insurance costs. When those payments come due, the mortgage company pays them on your behalf out of your escrow account.
Did you know? An escrow account makes it easy to manage your property taxes and insurance payments, since the bank makes these payments for you when they're due.
3. How do I keep track of my escrow account?
On your mortgage statement, you'll notice that your payment is broken down into categories:
- Your loan principal, which pays down your mortgage debt
- Your loan interest
- Your monthly escrow payment for your taxes and homeowner's insurance, as well as private mortgage insurance if required
The statement will also show your escrow account balance from month to month. Every year or so, your lender will evaluate your escrow payment to make sure that it adequately covers your insurance and property tax costs. If you have any questions about your escrow account payments or balance, talk with your lender.
4. Why do I need an escrow account?
Most lenders require you to have an escrow account as part of the terms of your loan. It protects you by having you pay small amounts each month toward these larger annual bills. That way you won't have to scramble to pay a large bill once each year — and you can rest assured that the payments are made on time by your mortgage company.
If your lender doesn't require you to have an escrow account, you'll have to pay your property tax and homeowner's insurance in full when they come due each year. These payments often amount to thousands of dollars, which can be a financial burden to homeowners. If you don't pay them on time, you'll face consequences in the form of penalties, fines, or loss of insurance coverage. In extreme cases, unpaid taxes can lead to a lien on your home.
5. How much money is in an escrow account?
The amount of money held in your escrow account is an estimated total to cover your annual property taxes, homeowner's insurance, and private mortgage insurance (if applicable). Before you sign the paperwork to purchase your home, your lender will estimate these amounts based on county tax records and quotes from insurance providers. In addition, some lenders will hold a little extra money as a cushion, in case your taxes or insurance premiums are higher than expected.
Interested in learning more about buying a home?
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
People are also reading
Do you have questions or ideas?
Share your thoughts about this article or suggest a topic for a new one