The Basics of Escrow Accounts

What are Escrow Accounts

Mortgage escrows are special accounts set up in which money is held to pay property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items.

Escrows ensure that these items are paid in a timely fashion for first time home buyers. They guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes. This saves the homeowners from having to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year. Thus emphasizing their value.

Why increases in these accounts?

Sometimes unexpected increases arrive in your insurance or taxes. With escrows, these unexpected increases are taken care of. It is the responsibility of the mortgage company to allow for possible increases in tax or insurance premiums. They usually anticipate possible increases when they set up these special accounts. So mortgage companies typically cover shortages when tax or insurance payments increase.

It is very common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner. Mortgage companies will make up the shortage by increasing the amount you pay into your escrow fund each month. They usually give you the option to catch up the shortage or increase your monthly mortgage payment for the next year.

If the mortgage company ends up with too much money in your account, they will send the overage back to you. The mortgage company usually evaluates this once a year.

What are the advantages?

The advantage of an escrow account is mortgages have lower rates and down payments because of these accounts. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments. Which is important if we want mortgage companies to have money for us to borrow. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection. And for you the borrower, you don’t have to worry about surprise increases or large lump sum payments to come up with periodically during the year.

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