Mortgage Escrow Account

Most homeowners have their property taxes and insurance paid by their lenders as part of their monthly mortgage payment. Those payments come from the homeowner's escrow account. Mortgage escrow accounts are special accounts set up by the lender in which money is held to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items. Escrow accounts ensure that these items are paid in a timely fashion. They are a 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.

What’s good for homebuyers?

Using escrow can be beneficial for homeowners in several ways.

Guarantee that bills are paid on time: Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.
Unexpected increases are taken care of: It is common for lenders to cover the shortages when tax or insurance premiums increase unexpectedly, even though all the money for these bills has not yet been collected from the homeowner.
Lower rates and/or down payments: Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments, which could lower the rates and/or down payments.
Efficient for local governments: Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.

Why do lenders set up escrow?

Protecting the property from the risk of lapsed insurance coverage or delinquent taxes is very important for lenders as well as for the homeowners, because it serves as collateral for the mortgage loan. The cash in your escrow accounts assures the lender that the loan’s collateral (your home) will not be sold or seized for nonpayment of property taxes, nor lost to a fire or other catastrophe for lack of insurance.

How does escrow work?

Escrow rules are relatively simple. The mortgage lender must calculate the amount of the borrower's taxes and insurance for the upcoming year. That sum is split twelve ways and added to the homeowner's mortgage payment. The lender can also collect two months of additional escrow as a cushion. They deposit them in your escrow account – generally non-interest-bearing account -- and pay out later to the tax collector and insurer. If the lender determines there will be or is a deficiency in the escrow account, the lender can require additional monthly deposits to avoid or eliminate the deficiency.

The law requires lenders to give homeowners a yearly accounting of their escrow accounts. Surplus funds in escrow accounts must be promptly refunded. The yearly summary of a homeowner's escrow account must contain:

The monthly mortgage payment.
The portion of the mortgage payment going into the escrow account.
The total amount paid into and out of the escrow account, with each disbursement identified.
The balance of the escrow account at the end of the year.
An explanation of how any surplus or deficit is being handled by the lender.

Consumer complaints

There have been many consumer questions and complaints involving installment of escrow accounts, a common complaint being that of the bank collecting too much money. It is advised that consumers personally calculate their escrow to confirm the bank's numbers. Homeowners can also choose to pay real estate taxes and insurance in lump sums when they come due rather than in monthly installments to their escrow account.