When it comes to mortgages, there is no legal requirement for lenders to impose an escrow account on borrowers. However, certain loan programs or lenders may require an escrow account as a condition for lending. An escrow account is a savings account created by your mortgage lender to pay property taxes, property insurance, and other expenses related to homeownership. The mortgage servicer will deposit a portion of each mortgage payment in your security deposit to cover estimated property taxes and your mortgage and homeowners insurance premiums.
This way, you can avoid worrying about having to pay large amounts when your tax or insurance bill is due. Some borrowers like the ease of having an escrow account, while others prefer to make these payments themselves. If you're ever in default on paying your taxes or insurance, your lender will most likely revoke the exemption and require you to pay into an escrow account as part of your monthly mortgage payment for the life of the loan. On the other hand, with a home equity account, you have to pay the servicer a certain amount each month to cover property taxes, homeowners insurance, and (sometimes) private mortgage insurance and homeowners association fees.
Each year, the mortgage servicer will review your account to ensure that you are paying the right amount to maintain the required minimum balance. Your state may also have laws that dictate how and when escrow exemptions can be granted, so you may be subject to additional requirements. You may prefer to keep the money yourself until it matures so that you can keep it in an interest-earning account. Unless you have a lot of savings, an escrow account is an easy way to ensure that ongoing expenses related to your home are paid on time.