Everything You Need to Know About Adding an Escrow Account to Your Mortgage

Most mortgage lenders allow borrowers to open escrow accounts to cover insurance premiums and taxes. Each lender sets its own rules around these accounts, but they must send you annual statements of your escrow account. Your mortgage lender has the legal right to open and manage an escrow account to satisfy your mortgage debts. Your home equity account can also be used to meet your annual or semi-annual tax obligations.

To use this tool, you will make periodic deposits to this account. When your monthly mortgage payments are due, your lender will withdraw the appropriate amount from this account and update your bill to reflect the payment. Similarly, your lender will use the same procedure to pay your property tax debt. If your loan is a federally related home loan under the Real Estate Settlement Procedures Act (RESPA), there is a limit to how much you can make the lender pay into an escrow account.

After buying a home, your lender will open an escrow account to pay your taxes and insurance. After closing, the mortgage servicer takes a portion of your monthly mortgage payment and keeps it in the escrow account until your tax and insurance payments are due. Having an escrow account means never having to worry about missing an insurance bill or a property tax payment. Many lenders require you to open an escrow account as a condition of closing, because paying tax bills and home insurance bills protects your security (your home) from tax liens or disasters.

Setting up the account is easy: you sign the appropriate forms and provide advance payments of two to four months. Even if it's not necessary, you can set up an escrow account after closing. The process is the same, only the time is different. In most cases, you should be able to keep your current home insurance.

Your lender will add your insurance premium to your new escrow account and will continue to pay your insurance. Your new lender may require different levels of coverage, so you may need to add more coverage to your current policy. It's possible that if you deposit at least 20% and have a history of paying your mortgage on time, your lender will allow you to forgo an escrow account. An escrow account helps ensure that your insurance premiums and real estate taxes are paid on time; usually, your insurance company will do most of the heavy lifting.

Your mortgage lender will deposit the security deposit amount in your account each month and then pay your insurance bill, real estate taxes and, if necessary, your private mortgage insurance bill when they are due. When you close on a home, the lender usually opens an escrow account to deposit part of your monthly loan payment to cover the cost of your real estate taxes, insurance premium and private mortgage insurance. With that in mind, read on to learn more about escrow fees, what they include and how much you can expect to pay. For the duration of the mortgage, an escrow account will hold funds for taxes and home insurance.

Your escrow balance allows the company that administers your loan to take money out of your security balance to pay taxes or insurance. However, keep in mind that an escrow account can be an advantage; it's a good idea to write one check per month to your lender and let them distribute it to the tax authority and insurance company, rather than writing several checks each month. The closing of the security deposit is the point in the real estate transaction at which all parties have fulfilled their responsibilities. Other monthly expenses, such as a Homeowners Association fee, may also be included in the escrow account.

You may pay property taxes and insurance yourself instead of using an escrow account. If you are building a new home, the money may remain in custody until you have signed all the work. Because the escrow company works for both the buyer and the seller in the real estate transaction, the fee for its services is generally divided equally between the two parties.