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Mortgage basics: What is an escrow account?

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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 homeowners 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 will require that you 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 will 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 lien1 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.

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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.

  1. Realtor.com. "What is a Property Lien?" 23 May 2017. https://www.realtor.com/advice/sell/lien/ Back