What is an Escrow Account for a Mortgage?

When you purchase a home, your lender will open an escrow account to pay your taxes and insurance. This account is funded by a portion of your monthly mortgage payment. The money in the escrow account is used to pay for property-related expenses such as taxes, insurance, mortgage insurance, and flood insurance. The closing of the escrow account is the point in the real estate transaction when all parties have fulfilled their responsibilities.

Your lender or mortgage servicer will review your escrow account every year to make sure you're not paying too much or too little. The fee for the escrow company's services is usually split between the buyer and seller. If you meet the requirements of your mortgage servicer, you can choose to cancel your escrow account. Having an escrow account can give you peace of mind by eliminating your responsibility to make sure important bills are paid on time.

Instead of paying insurance and taxes separately from a checking account, the money to cover these bills plus a little more, a “cushion” is included in the total monthly mortgage payment. Borrowers who opt for a loan from USDA, VA Streamline Refinance or FHA must deposit funds into an escrow account as part of their monthly mortgage payment. Each month, a portion of your mortgage payment will go to your escrow account and the mortgage servicer will use that money to pay your taxes, mortgages and property insurance bills when they are due. If approved by the mortgage servicer, the escrow company will send you the remaining balance in the form of a check.

If you've bought a home without a loan or have paid off your mortgage, it's still possible to set up an escrow account to help you manage your property taxes and insurance premiums. You may have the option of making a one-time payment or increasing the amount of your monthly mortgage payment to make up for a deficit in your escrow account. You may also choose to pay property taxes and insurance yourself instead of using an escrow account. An escrow account is an important part of any real estate transaction.

It ensures that important bills such as taxes and insurance are paid on time and automatically. It may be tempting to run out of an escrow account because it could mean a lower monthly mortgage payment, but having an escrow can give you peace of mind.