What is an escrow account?
Established by your lender, an escrow account is a place to set aside a portion of your monthly mortgage payment to cover annual charges for homeowner’s insurance, mortgage insurance (if applicable), and property taxes. Escrow accounts are a good idea because they assure money will always be available for these payments. If you use an escrow account to pay property taxes or homeowner’s insurance, make sure you are not penalized for late payments since it is the lender’s responsibility to make those payments.
An escrow account is an account established by your bank or mortgage lender to pay your real estate taxes, homeowner’s insurance and mortgage insurance (if any) on your behalf. Your monthly mortgage payment consists of four items: Principal, interest, taxes, and insurance — also known as PITI. The principal and interest are paid directly to your lender, while the taxes and insurance are deposited into the escrow account. The money is then drawn from the escrow account annually to pay the property taxes and insurance. This ensures that the money is available to pay the taxes and insurance on your home. Also, an escrow account is an account held by a third party for safekeeping of specific money while a transaction is in progress, such as your earnest money deposit.
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 (hazard and mortgage), 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. Some lenders require that you carry an escrow account and other lenders make this optional. Also, some lenders will offer more favorable terms to borrowers who are willing to include this with their payments.
Lenders often set up an account, called an escrow or impound account, to hold money to pay your taxes and homeowners insurance. At closing, the lender will collect sufficient money to establish reserves in these savings accounts. Each month thereafter, a portion of your monthly payment is deposited into the account. The lender will then use the money from the account to pay the tax and homeowners insurance bills when they are due.
Lenders often set up an escrow account also known as an impound account to hold the tax and insurance portion of your mortgage payment. At closing, the Lender will collect sufficient funds to establish the necessary monies in this account. The reserves, plus monthly deposits are held until they need to be used by the Lender to pay the taxes and insurance.
