What Is an Escrow Account And How Does It Work?

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An escrow account is an account that is set up by your mortgage lender to collect, hold and pay your taxes and home owners insurance when they become due. The purpose of the account is to ensure the property tax and home insurance bills get paid.

Not everyone that purchase a home will have an escrow account. However it is a requirement for certain type of loans. For example, FHA loans require all borrowers to have an escrow account, while conventional loans borrowers will need to have 20% down payment or more to avoid an escrow account and VA loans require 10% down and strong credit to opt out of having an escrow account.

 The account is managed by your mortgage servicer, which can also be the mortgage lender. The mortgage servicer/lender not only manages your escrow account, but will manage your mortgage until it is paid off. Do keep in mind that your mortgage servicer can change. Lenders can and will sell the servicing rights to your loan.

 The way your escrow account work, is, each month, your mortgage servicer takes the property tax and home owners insurance portion from your mortgage payment and place it into your escrow account. The money is then used to pay the property taxes and home owner insurance when they become due. This is usually once a year.

 Because property taxes and insurance amount will change yearly, your mortgage loan servicer will review your account one a year to make sure they are collecting enough money to pay both expenses.  

If they are not collecting enough, you will be notified and given an option to pay the shortage by way of a one-time payment or by increasing your monthly mortgage payment to make up for the shortage.  However, if they collected too much money, you will receive an escrow refund.  If at anytime you have questions about your escrow account, you can always call your mortgage servicer. We love having you visit us. We hope the information we provide help you to make the most inform decision. As always, thank you for dropping in. Until next time…Diana