Mortgage Loan: Escrow Basics

If you are applying for a mortgage the lender may require you to have an escrow account pay your insurance and property taxes. Lenders do this to protect the property secured by the mortgage loan they have given you. Here is what you need to know about escrow accounts.

Escrow accounts are a way for your mortgage lender to ensure that your property taxes and insurance are paid on a monthly basis. The lender is protecting their interest in your home against seizure for failure to pay property taxes or damage that would be covered by insurance. Escrow is a third party company that pays the insurance and taxes for you. The monthly payment you make will include the monthly amounts for your insurance and taxes; you will make your payment directly to the escrow company and they will use this money to pay the mortgage lender, insurance, and property taxes. The mortgage lender may require you to make an initial deposit to the escrow company in case you fall behind on the payments.

Escrow can be beneficial to many homeowners by spreading the payments for taxes and insurance throughout the year. Because the escrow company makes these payments, the homeowner has one less thing to worry about. By making monthly payments the amount due is easier to manage for homeowners on a tight budget.

Mortgage lenders are limited in the amount they can require you to pay in escrow; two months payment is the most your lender can legally require you to deposit in your escrow account. The escrow company will handle adjusting your payment amount for increases in your property taxes and insurance; you will receive periodic notifications from the escrow company whenever there is a change in your monthly payment amount.

Some homeowners prefer not to use escrow accounts to pay their taxes and insurance. If you have good credit the lender may be willing to waive the escrow requirements if you make the necessary down payment. To learn more about financing your home and how to avoid common mortgage mistakes, register for a free mortgage guidebook.