What is an escrow account?
When borrowers make their monthly mortgage 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 (also known as an impound account), until the lender pays the taxes and insurance premiums as they come due. The borrower benefits for budgeting reasons because costs are spread through the year rather than as a lump sum. This allows the lender greater control in avoiding tax delinquencies or lapses of hazard insurance coverage on the property. Mortgage documents often require that lenders establish an escrow account.
An escrow account is a separate bank account that holds monthly funds that you send as part of your monthly mortgage payment that are held to pay real estate taxes, homeowners insurance and other important items (if required by your mortgage contract), such as ground rent or homeowners dues. When you make your payment each month, part of that payment is used to reduce the amount that you borrowed to purchase your home, along with interest; and part is set aside in an escrow account to accumulate until your property tax bill, or homeowners insurance, or etc. needs to be paid. Bogman then draws the necessary funds from that escrow account and pays the bill for you. You benefit, in that you pay a little each month, instead of being faced with a large bill one or more times a year.
An escrow account is a trust account established by a lender to hold money for real estate taxes, PMI payments, and hazard insurance premiums as they are received each month. The money is sent to the lender each month in addition to your regular principal and interest payment. When the bill is due, the escrow account disburses the money. If you borrower more than 80% of the home’s value you will be required to escrow with most lenders. Choosing not to escrow can also affect your interest rate.
An escrow account involves a process whereby an impartial third party, such as an attorney, an escrow company or a title company, is entrusted with the job of seeing that the transfer of ownership from the Seller to the Buyer takes place according to the terms of the written contract agreed upon by all parties involved. The escrow agent (third party) holds any funds safely until all the conditions and details have been realized as instructed by the contract and disburses the funds to the proper parties at the proper time as outlined in the escrow agreement signed by both the buyer and seller.
An escrow account is typically established at the time you close your mortgage loan. This account is held by the lender for the future payments of recurring items relating to the mortgaged property, such as real estate taxes and insurance premiums, as they become due. Lenders usually require you to pay an initial amount for each of those items to start the reserve account at the time of closing.
