Understanding the Basics of Escrow Accounts

October 4, 2009 | Filed Under Money

by Crystal Guthrie

When you purchase a home, there are many other expenses involved with taking ownership than simply paying back your mortgage loan. In addition to having to pay for routine maintenance of your home, you will also need to pay for homeowner’s insurance and property taxes. Your mortgage lender will likely provide you with the option to open up an escrow account in order to make the process of making these payments easier. It is important for you to gain a better understanding of what an escrow account is and how it works before you agree to escrow terms.

In its most basic sense, an escrow account is an account that is handled by a one party in order to pay a third party. You pay an additional amount of money each month when you make your mortgage payment, when you have an escrow account through your mortgage lender. These additional funds are used to pay for your homeowner’s insurance as well as your property taxes, with your lender making the payments for you on your behalf.

The amount of your homeowner’s insurance and taxes being estimated, your lender will re-examine your escrow account every year or maybe every six months. If your escrow account falls short of having enough money to cover your expenses, you may be given the option to pay the shortage upfront or your monthly payment may be increased in order to cover the expenses. On the other hand, you may receive a check for the additional amount, if you have additional funds in your account.

Though you can end up paying a bit more than required upfront, having an escrow account can be quite advantageous to a homeowner. Not having to worry about making certain your insurance and taxes are paid by a certain deadline is an example. Apart from giving you one less bill to worry about, you also don’t have to worry about getting hit by a large bill once every six months or so. Because the expense is spread out over a number of months and is included in your mortgage payment, they seem quite more manageable.

On the surface, it may seem as if providing an escrow account service would be a major inconvenience for a lender, making you wonder why lenders would bother with setting up these accounts. The truth is that having an escrow account set up along with the loan is advantageous to the lender as well.

Do not forget that lenders have a vested interest in the property that you have purchased. After all, if you default on the loan, the lender will need to try to resell the property in order to recoup the money it has lost. Similarly, the lender will experience a loss, if your home is damaged or if it is taken over by the city, state, or county, because you failed to pay your taxes. The lender is essentially protecting its investment by including your tax and homeowner’s insurance payments in the mortgage loan payment and by paying these expenses. Because of these reasons, you will most probably not have an option regarding setting up an escrow account, as your lender will require it in order to make certain these expenses are getting paid.

About the Author:

Crystal Guthrie is a Texas real estate agent that has been actively selling Austin TX Homes since 2004. Crystal specializes in Dripping Springs Homes and has sold properties in every price range and area around Austin, Texas.

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