Escrow is an account into which money is paid in addition to the monthly mortgage payment which goes into an account for the purpose of paying property taxes and homeowner’s insurance. This money is considered to be ‘held in escrow’. When those property taxes and homeowner’s insurance come due, the bank pays those bills for you out of the escrow account.
Escrow is essentially a non- interest bearing savings account that you deposit a certain amount into each month. The amount will be determined by an estimation of what your property taxes will be plus what the insurance company is charging to cover your home. You may have this amount added right into your mortgage payment allowing you to write one check or make one payment monthly for all of this.
Escrow Benefits
Escrow is a benefit to you in that you don’t have to worry about the property taxes or homeowner’s insurance. They will be paid for you when they are due. You will receive notification when this takes place and it’s a relief to know that someone else has taken care of it. You also don’t have the worry of being unable or ill prepared to come up with those additional funds for taxes and insurance.
An escrow account benefits the lending institution as well. They hold your mortgage and do not want you to default. The escrow account assures them that you won’t be losing the home due to non-payment of taxes or through a catastrophic loss such as fire. Should the home be destroyed by fire, the bank will receive the amount still owed on your mortgage. They are after all in the business of loaning money and having it repaid with interest.
When you apply for a mortgage, your approval may be contingent on your agreeing to setting up an escrow account. This is likely if you’ve had a poor credit history. Some banks will insist on the escrow account regardless of anyone’s credit history and it’s required with all of their mortgages. Others don’t offer this convenience and you will be fully responsible for making those payments yourself.
No Escrow with your Mortgage?
If your lender doesn’t have the availability of escrow to offer you, be sure to set up a savings on your own, specifically for property taxes and homeowner’s insurance. You will need to estimate approximately how much the yearly cost for these will be. Just take a look at the previous years taxes and your insurance company of course can give you an exact amount. Then create a plan for depositing the needed amount at regular intervals into that savings account. You will have the money available when due, even without the convenience of the escrow account.
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