If you frequent websites focused on homebuying, real estate markets, and other related topics, you’re likely familiar with the word “escrow,” but you may not know what that really means. Well, luckily for you, one of our past blog posts tackled that subject “What You Need to Know About Real Estate Escrow”. Within escrow, though, it is important to know that when you begin escrow, an escrow account is set up. What is an escrow account? Let’s find out.

Escrow Before Closing

An escrow account is an account designed to temporarily hold funds in a safe place. The escrow provider should be a third party with no preference regarding who ultimately receives funds from the account. In a real estate transaction, for example, the escrow account does not belong to the buyer nor seller. Because of this, escrow accounts are useful in four distinct ways: homebuying, monthly payments, renters and landlords, and buying goods and services. It’s likely no secret which one we’re most interested in.

Escrow Taxes and Insurance

In short, an escrow account serves as a savings account which your mortgage servicer manages. The mortgage servicer deposits a portion of each mortgage payment into the escrow account to cover for your estimated real estate taxes and insurance premiums.

 

 

When do you need an escrow account?

That depends on the type of loan and who your lender is, but even when an escrow account isn’t necessary, it is still a good idea to create one. If you don’t have an escrow account, you are responsible for paying property taxes and insurance—you need to handle the budgeting and payments on your own. If you have an escrow account, your lender manages the payments and budgeting for you, allowing you to spread out your taxes and insurance payments over the year, rather than one lump-sum payment. These taxes and payments become part of your regular monthly mortgage payments. This ensures that those payments are made on time—meaning you avoid penalties, late fees, and potentially liens against your home.

Because property taxes and insurance premiums change over time, it is wise to review your escrow account annually to make sure you have enough to cover your expenses. Also remember that you need to keep a minimal balance in the account to keep it open. If there are any shortfalls in the account, generally speaking, the lender typically covers them temporarily—eventually increasing your monthly mortgage payment to make up the difference, though you will get a notice letter from your lender when that measure is taken. Additionally, the servicer is required to send you an escrow statement annually, showing you the amount you’ve paid as well as any overages and/or shortages.