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Why Your Mortgage Has an Escrow Account and How It Works for You

May 15, 2025 by Kay Monigold

When you close on a home loan, you’ll likely hear the term “escrow account” mentioned—and if you’re like most buyers, you may not be entirely sure what it means. While it might sound complicated, an escrow account is a helpful tool that simplifies homeownership and protects your investment.

What is an Escrow Account?
An escrow account is a separate account set up by your mortgage servicer to hold funds for specific home-related expenses, most commonly property taxes and homeowners’ insurance. Rather than paying those large bills all at once, you make monthly contributions as part of your mortgage payment. When the bills come due, your mortgage servicer pays them on your behalf from the escrow account.

Why Do Lenders Require Escrow Accounts?
Lenders want to ensure your property taxes and insurance premiums are paid on time. If those payments aren’t made, your home could be at risk, either from legal claims (like a tax lien) or from damage without insurance coverage. Since your home is the collateral for the mortgage, it’s in the lender’s best interest to protect it.

That’s why many mortgage lenders require escrow accounts, especially for borrowers who make smaller down payments or use government-backed loans. In some cases, if you put down at least 20%, you may be able to opt out—but it depends on your lender’s guidelines.

How Escrow Accounts Affect Your Monthly Payment
Your monthly mortgage payment includes more than just principal and interest—it often includes escrow payments, too. Each year, your lender estimates how much you’ll owe in taxes and insurance, divides that total by 12, and adds that amount to your monthly bill.

Because these costs can change from year to year, your lender will conduct an annual escrow analysis. If taxes or insurance premiums go up, your escrow payment may increase. If they go down, you might receive a refund or a lower payment.

What Happens If There’s a Shortage?
If there isn’t enough money in your escrow account to cover your bills, say, if your property taxes increased unexpectedly, your lender will notify you of a shortage. You’ll typically have the option to pay the difference in a lump sum or spread it out over the coming year.

Escrow Accounts Offer Peace of Mind
Instead of having to remember due dates and save for large annual expenses, your escrow account helps you stay on track. It’s a built-in budgeting tool that simplifies the financial side of homeownership—and ensures your biggest investment stays protected.

Filed Under: Mortgage Tips Tagged With: Escrow Account, Homeownership, Mortgage Tips

Understanding Mortgage Escrow Accounts and Why They Are Important

February 25, 2025 by Kay Monigold

A mortgage escrow account is a financial tool used by lenders to manage and disburse payments for property-related expenses, like property taxes and homeowners insurance. Rather than paying these expenses separately, a portion of your monthly mortgage payment is set aside in the escrow account. When taxes or insurance premiums are due, the lender pays them on your behalf.

How Does It Work?

  1. Initial Deposit: When you close on your home, your lender typically requires an initial deposit to fund your escrow account. This ensures there are sufficient funds for upcoming tax and insurance payments.
  2. Monthly Contributions: Each month, a portion of your mortgage payment goes into the escrow account. The amount is based on an estimate of your annual tax and insurance costs, divided into 12 equal payments.
  3. Disbursements: When your property taxes or insurance premiums are due, your lender uses the funds in the escrow account to pay them directly. This helps homeowners avoid missing payments or incurring late fees.
  4. Annual Review: Lenders conduct an escrow analysis each year to ensure you’re paying the right amount. If your taxes or insurance premiums change, your escrow payment may be adjusted accordingly.

Why Is Escrow Important?

  • Simplifies Budgeting: Instead of paying a large lump sum for taxes or insurance, escrow spreads out the cost over 12 months, making it easier to manage.
  • Ensures On-Time Payments: By handling tax and insurance payments on your behalf, an escrow account helps prevent missed deadlines, which could lead to penalties or lapses in coverage.
  • Protects You and the Lender: Escrow accounts ensure your home remains properly insured and that property taxes are paid, preventing tax liens or insurance gaps that could put both you and your lender at risk.

Can You Opt Out of an Escrow Account?

In some cases, homeowners may have the option to waive escrow, typically if they make a large down payment (usually 20% or more). However, this means you’ll be responsible for managing your tax and insurance payments separately—something that requires discipline and financial planning.

Mortgage escrow accounts provide convenience and peace of mind by ensuring your taxes and insurance are paid on time. While some homeowners may prefer to handle these payments themselves, for many, escrow simplifies the process and prevents financial surprises. If you’re unsure about how your escrow account works, reach out to your lender to review your setup and make sure it meets your needs.

 

Filed Under: Home Mortgage Tips Tagged With: Escrow Account, Home Buying101, Mortgage Tips

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Our Team

Kay MonigoldKay Monigold
Owner/Mortgage Broker/Residential Mortgage Loan Originator
NMLS#1086176

Ron MartinRon Martin
Residential Mortgage Loan Originator

NMLS#316821

Steven LoweSteven P Lowe, Sr
Residential Mortgage Loan Originator
NMLS #1085638

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