What is an Escrow Account and Who Maintains It?

Escrow accounts are a common feature of mortgage lending, used by lenders to save money and pay for expenses such as property taxes and homeowners insurance. The account is managed by the lender, who is responsible for sending payments in due time. Homeowners are responsible for paying the escrow amount each month, in addition to their mortgage payment.

Escrow refers to an agreement in which a neutral third party receives, holds, and pays funds as specified in a contract. While used in a variety of financial situations, escrow accounts are most often used in the real estate context to help manage property tax and insurance payments.

When you buy a property, the lender usually requires an escrow account, and it can only be avoided if you make a down payment of more than 50%, have an excellent credit rating, or don't have any loans. Once all the documents are signed, the escrow officer will prepare a new deed naming you the property owner and send it to the county registrar. Your real estate agent will oversee this entire escrow process, so don't worry if you need help understanding all the details.

If you bought a home without a loan or paid your mortgage, it's still possible to set up an escrow account to help manage property taxes and insurance premiums. Mortgage holders are required to send you an annual statement on the activity of their escrow account, which may also be referred to as a foreclosure account. Your yearly income, credit score, and payment history will determine whether or not you need an escrow account. In real estate, escrow accounts are used for two primary purposes: withholding a down payment on the property and withholding funds for property taxes and insurance.

That's why some homeowners can cancel their escrow account and transfer their money to a savings account with an interest rate. First, read all letters and correspondence from the lender and keep any related changes to your escrow account. Then, you'll present a cashier's check or arrange for a bank transfer to pay the remaining down payment, part of which is covered by escrow money and closing costs, and the lender will transfer the loan funds to an escrow to be able to pay the seller and, if applicable, the seller's lender. One of those difficult-to-understand elements is the escrow process, which occurs between the time the seller accepts the offer and the buyer receives the keys to the new home.

Each month, a portion of your mortgage payment will be deposited in your escrow account, and the mortgage servicer will use that money to pay your taxes and mortgage and homeowners insurance bills when they are due.