What is the Purpose of a Mortgage Escrow Account?

When closing a mortgage, your lender can open a mortgage deposit account in which part of the monthly loan payment is deposited to cover some of the costs associated with owning a home. These costs may include, but are not limited to, real estate taxes, insurance premiums, and private mortgage insurance. Home equity accounts are generally used to collect and pay property taxes and home insurance payments. Lenders want to ensure that your property is insured and that taxes are paid on time, which reduces the risk for the bank that you won't repay the loan or incur property liens.

The amount needed to cover these payments is added to your mortgage payment each month. For homeowners, a mortgage deposit account is a special withholding account for their home insurance premiums, mortgage insurance payments, and property tax payments. Because of the large amount of money held in custody, these accounts have become the target of scammers. Escrow accounts can be managed by a variety of third parties, including an escrow company, escrow agent, or mortgage servicing entity.

The trust is a valuable and essential tool in the buying process, as it provides security to both the buyer and the seller of the property. With an escrow account, the third party holds or manages the funds until the transaction is completed or a contract is fulfilled. It may be tempting to run out of an escrow account because it could mean a lower monthly mortgage payment, but the escrow can give you peace of mind by eliminating your responsibility to make sure those important bills are paid. The custody officer or custody agent complies with these agreed terms and provides the funds to the appropriate party.

Second, real estate collateral provides reassurance to the buyer, seller and lender that, if the deal fails, no one's investment will be compromised. You can expect to deposit an additional 1 to 2 months of taxes and insurance into a new escrow account in addition to your current escrow balance. 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. While there is no law requiring lenders to impose an escrow account on borrowers, certain lending programs or lenders require escrow accounts to be a condition for lending.

If you're not refinancing with your current lender, you'll need to deposit funds into the new escrow account at the time of settlement and then wait to receive a check from your current lender. Not only does the escrow company manage the buyer's deposit, but it may also be responsible for keeping the deed and other documents related to the sale of the house. The growth of online shopping over the past two decades has led to an increased use of the escrow process to protect buyers and sellers. However, many home buyers and sellers can't answer the question “what is a security deposit?” or explain how it works.

Escrow accounts are often necessary when you finance more than eighty percent of a home's value, so most first-time buyers will automatically enjoy the ease of budgeting offered by an escrow account.