What is an escrow account?
An escrow account is established at the time you close your mortgage loan. This account is held by the lender for future payments as they become due of recurring items relating to the mortgaged property such as real estate taxes and insurance premiums. Lenders usually require you to pay an initial amount for each of those items to start the reserve account at the time of closing. Once your mortgage is paid in full, you are still responsible for paying taxes and hazard insurance.
When borrowers make their monthly payments, they generally also pay one-twelfth of the anticipated annual amount needed to pay taxes and insurance premiums. These additional funds are deposited into an escrow account, until the lender pays the taxes and insurance premiums as they come due. The borrowers benefit for budgeting reasons because costs are spread through the year rather than as a lump sum. The escrow account is reviewed annually and payment is adjusted accordingly.
