Understanding What Escrow Is

Your lender will set up an escrow account to help you pay homeowners insurance and property taxes if these homeownership costs arise during a year. Here are some details about escrow accounts and how they work.

Costs Of Homeownership And How They Are Paid

When you own a home, your main costs are principal, interest, taxes, and insurance (P.I.T.I.)

Your mortgage payment consists of principal and interest. For all primary mortgages (not second), these payments are due each month on the 1st of each month. There is a grace period of 15 days each month before a late charge is assessed.

Lenders will require that you insure your home. These insurance payments are made to the insurance company you choose (so long as the lender certifies that the coverage you have selected is adequate) each year or semi-annually.

State and local governments require property taxes on real estate that you own. Depending on where you live, property taxes may be due quarterly, semi-annually, or annually.

An escrow account can automate the required monthly savings needed to pay property taxes and insurance payments when they are due.

Account For Insurance And Taxes - Escrow or Impound

Most lenders will require that you set up an escrow (also known as an impound) account if you are putting down less than 20% on a home. This account allows you to pay monthly installments in addition to your mortgage payment. It also accrues property tax and insurance payments.

Your lender will use your expected annual property tax and insurance obligations to calculate the monthly escrow payments. Your mortgage statement will show how much you have in your escrow account each month.

Your lender will then pay your insurance and property taxes bills when they are due. The law also requires that you receive an annual escrow analysis showing all funds received and used for insurance or property tax.

Lenders will let you pay your property tax and insurance bills in lump sums if you have more than 20% down payment. Even if your lender doesn't require you to open an escrow account, you can do so voluntarily.

What Amount Of Money Must Be In The Escrow Account?

Lenders will usually require that escrow accounts contain at least two months' worth of insurance or property tax funds. This can make it more difficult to raise cash for closing. However, these funds are not additional closing costs. Instead, you are prepaying additional months of insurance and property taxes bills that you will be required to pay at due.

How much you have to pre-fund an escrow account with at loan closing changes based on your location, and your lender will put this amount in writing on your initial Loan Estimate. Ask your lender for details about the funding requirements of escrow accounts in your local area.

Tips For Escrow Account Customers

These are the most important things to know if you decide to use an Escrow Account.

Even if your lender uses an escrow account to pay your homeowner's insurance or property taxes, they are still your responsibility. Your lender will not make payments on time if you don't pay. You are responsible for any unpaid property taxes and insurance provider. Therefore, you must keep an eye on your lender to ensure they are paying on time.

Every month, check your escrow balance on your mortgage statement to make sure it is on track and has enough money to pay your property taxes and insurance on the due dates. Although your lender will provide an annual escrow analysis, they may make mistakes in some counties due to more complicated property tax structures. Therefore, ask your lender to verify that your escrow account process is compatible with local property tax laws when putting in your loan.

Your escrow payment will rise if your property taxes or insurance increase. This will result in a higher monthly payment. Do not confuse an increase in your overall mortgage payment with an increase in your actual mortgage payment. Ask your lender for explanations and verify the increase with your insurance company and the property tax collection office/website in your county.

You must make a plan to save enough money each month to pay your property taxes and insurance when they become due.

Your lender could pay your property taxes if you don't pay them. However, they may also add the amount to your loan balance and ask you to open an escrow account.

Your lender can purchase insurance to cover you if you don't pay your homeowner's insurance. They may also require you to open an escrow account.

If your lender fails to pay your property taxes or insurance from your escrow account, and they are non-responsive, you can consult the Consumer Financial Protection Bureau on how to take corrective action.