Question
What Is An Escrow Account?
Answer
When it comes to mortgages, there are two instances where you might hear about escrow accounts. The first that buyers encounter is before the sale. In this case, the escrow account is established by neutral third parties to hold money for the buyer or seller. Typically, a buyer’s down payment will be placed in this account until the sale is finalized.
The second type of escrow account is established after the sale. If a buyer’s down payment is less than 20% of the home’s value, the lender will typically require an escrow account. Property taxes and property insurance will be broken down into equal payments and those amounts added into your monthly payment and deposited into your escrow account.
The main benefit of escrow accounts – for both the borrower and the lender – during the life of the mortgage is that property insurance and property taxes are already budgeted into the borrower’s monthly payment and paid by the lender. It is in both the borrower’s and lender’s best interests that both of these payments be made on time on a consistent basis. Commonly, the lender will perform an annual escrow analysis to ensure the amount collected closely matches what needs to be paid in taxes and insurance. When necessary, they will make adjustments to the monthly mortgage payment.
Once the mortgage is paid in full, anything remaining in the escrow account will be returned to the borrower.