Escrow Account
A separate account where lenders hold funds for property taxes and insurance, ensuring these bills are paid on time.
What You Need to Know
An escrow account is your mortgage lender's way of making sure property taxes and homeowners insurance get paid. Instead of you paying these bills yourself, the lender collects 1/12 of the annual cost with each mortgage payment.
What It Covers:
- Property taxes
- Homeowners insurance
- Private Mortgage Insurance (PMI) if applicable
- HOA fees (sometimes)
How It Works:
- Lender estimates annual taxes + insurance
- Divides total by 12 months
- Adds this amount to your monthly mortgage payment
- Pays the bills directly when due
Example:
- Annual property tax: $6,000
- Annual insurance: $1,800
- Total: $7,800/year
- Escrow payment: $650/month added to mortgage
Escrow Analysis: Lenders review the account annually and adjust your payment up or down based on actual tax/insurance changes. If they collected too much, you get a refund. Too little, you owe the difference.
When Can You Drop Escrow? Once you have 20% equity, some lenders allow you to waive escrow and pay taxes/insurance yourself—but you must stay on top of deadlines.
Sources & References
This information is sourced from authoritative government and academic institutions:
- consumerfinance.gov
https://www.consumerfinance.gov/ask-cfpb/what-is-an-escrow-or-impound-account-en-140/
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