Escrow Account Guide
When you buy a home with a mortgage, your lender will likely require an escrow account. This account protects both you and the lender by ensuring property taxes and insurance are paid on time. Understanding how escrow works helps you budget properly and avoid surprises.
What is an Escrow Account?
An escrow account is a holding account where a portion of your monthly mortgage payment is set aside to cover property taxes, homeowners insurance, and sometimes mortgage insurance. Your lender manages this account and makes payments on your behalf when they're due.
What Escrow Covers
- Property Taxes: Paid to your local government annually or semi-annually
- Homeowners Insurance: Protects your home and belongings
- Mortgage Insurance: If required by your loan type
- Flood Insurance: If your property is in a flood zone
Escrow Payments
Your monthly escrow payment is determined by dividing annual costs by 12. If your property taxes are $3,600 per year and insurance is $1,200, your monthly escrow would be $400. This is added to your principal and interest payment.
Escrow Analysis
Lenders perform annual escrow analyses to ensure sufficient funds. If costs increase, you may need to pay a shortage. If there's a surplus, you may receive a refund. Keep records of all tax and insurance bills to verify accuracy.
Escrow Shortages
When property taxes or insurance costs increase, you may have a shortage. Options include paying the shortage upfront or spreading it over 12 months. Both result in higher monthly payments.