Understanding Escrow Accounts
An escrow account helps homeowners manage large expenses like property taxes and insurance by breaking them into manageable monthly payments. Some lenders require an escrow account, while others offer it as an optional service to simplify budgeting.
How Escrow Accounts Work
When you make a monthly mortgage payment, part of it covers your loan principal and interest, while the rest goes into an escrow account. The funds in escrow are set aside until your property tax and homeowners insurance payments are due, ensuring they are paid on time.
Lenders often require escrow accounts to mitigate the risk of missed tax or insurance payments, which could result in financial penalties or uninsured losses. Even if escrow isn’t required, many homeowners choose to use it for convenience and peace of mind.
What Does an Escrow Account Do?
Simplifies Budgeting
Spreads large annual costs into smaller, predictable monthly payments.
Ensures On-Time Payments
Prevents late fees or lapses in insurance coverage.
May Be Required
Some mortgage agreements mandate an escrow account.
No Need to Save Separately
Eliminates the stress of setting aside funds for taxes and insurance.
Managing Payments Without Escrow
If your lender does not require an escrow account, you can choose to handle tax and insurance payments yourself. However, this means budgeting for large lump-sum payments, typically due once or twice per year.
Some homeowners wonder if they could earn more interest by keeping their funds in a separate savings account instead of escrow. While this may be true, the potential earnings are often minimal, especially in a low-interest-rate environment. The convenience of escrow often outweighs any small financial gain.
Have Questions About Escrow?
Our team can help you understand how escrow works and determine whether it’s the right choice for your mortgage. Contact us today to learn more.
Important Legal Disclosures
*All loans are subject to credit approval