When you are purchasing a new home one of the terms you are going to come to know is mortgage escrow account.
“But what is a mortgage escrow account? What’s the purpose of it when owning a home?,” you may be thinking to yourself.
Before we get into what a mortgage escrow account is let’s look at what escrow, in general, is…
Basic Concept of Escrow
Escrow is widely used in many business transactions where the buyer and seller cannot make a simultaneous exchange of money and goods or services and neither would want to deliver first without the guarantee to receive later (neither party wants to risk being the one left without the dough).
To resolve the trust issue between a buyer and seller, a third party, known as the escrow, can work on behalf both the buyer and the seller to ensure that once a party fulfills its contractual obligation, the escrow will release to the party what it entitles from the transaction.
Such escrow service is also standard practice in real estate transactions where the buyer deposits money with the escrow and the seller delivers title documents to the escrow, and the escrow firm will not release the funds to the seller or convey the title to the buyer until both the funds and the documents are placed with the escrow.
Purpose of Mortgage Escrow Account
A mortgage escrow concerns the homeowner and the mortgage lender.
Part of the contractual obligations in a mortgage loan agreement is for the homeowner to pay property taxes on time and keep the homeowner insurance up to date. Failing to meet those responsibilities by the homeowner has potential negative effects on the mortgage lender, as a government tax lien on the property or any not-insurance-covered damage to the property could reduce or potentially destroy the value of the collateral that the homeowner has placed with the mortgage lender against the borrower’s home.
In order to have a clean title to the property and a recoverable value of the collateral in the event of mortgage default, the mortgage lender looks for a payment guarantee on property taxes and home insurance by using an escrow account.
How Mortgage Escrow Account Works
Concerned about how protected its mortgage collateral is, the mortgage lender often requires the set-up of a mortgage escrow account that from time to time can release funds to pay property taxes to the county and insurance premiums to the insurance company on the homeowner’s behalf.
The homeowner is responsible for depositing funds into the mortgage escrow account on a monthly basis as part of the mortgage payment arrangement. When the property taxes and insurance premium become due, the escrow firm will transfer the funds to cover the payments.
Related: Paying a high mortgage rate? Check out some great mortgage and refinance rates in your area.
Benefits of Mortgage Escrow Account
A mortgage escrow account provides benefits to both the lender and the homeowner.
For the mortgage lender, an escrow account brings added security and assurance about the safety of the its mortgage collateral, the borrower’s home. With the escrow account paying property taxes on time and keeping the insurance policy up to date, the mortgage lender needs not to worry about any seize on the property by tax authorities or losses from property damage uncovered by the insurance company.
For the homeowner, an escrow account provides a way to better budget property tax and insurance payments. Instead of having to come up with a lump sum when the bills are received, making smaller, monthly deposits into an escrow account reduces the possibility of funds shortage.
Additionally, with an escrow account, no more due dates to remember as the escrow company will send in payments on time on the homeowner’s behalf.
When buying a home, a buyer needs to know what is required in the mortgage escrow (home insurance, property and local taxes) as well as realize how the escrow will impact their monthly bills as the escrow amount will be higher than just the mortgage payment.
This is a crucial concept in calculating if you can afford a home, and if so, what you can really afford.
Escrow accounts can be helpful when it comes to “no more due dates”, but you still need to be very vigilant on your tax statements and make sure your escrow account is paying enough. When my parent’s property taxes went up last year, they received a notice from the county saying they were delinquent. It turned out the escrow account company didn’t realize the amount due went up, and shorted the county. As a result, my parents were on the hook for the late fees as well as the difference. Just be careful!
If the bill was part of the regular tax cycle then your parents should not have been on the hook for it. However, if it was an added assessment or supplemental bill that caused the increase then it is the homeowner’s responsibility to either notify the mortgage company to pay it or do it themselves.
If it was the mortgage companies fault then I’d write a letter and asked to be reimbursed for the penalty.
(My job is to pay property taxes from escrow.)
Thanks for the info!
That’s great to know! Thanks for the reply!
Same thing happened to us concerning our escrow account. We are seniors and not real estate experts, so understanding escrow as explained in the letter we received from our bank left us questioning exactly what is happening with our mortgage payments!
We have been told by our bank that there has been a shortage on our escrow payments for last year by $666 and change. They say a payment for this shortage will be spread out over a year through our mortgage payments. This has happened before where the estimated escrow has fallen way short of the actual amount required. This time we are required to pay another $100 per month on our mortgage payment! This is puzzling to us because 12 X 100 = $1200. Are they planning on being off a year in advance? We do not feel that this situation is our fault!
They say if we pay the amount we are short, our payment will be $56 less per month. Only around half of the mortgage increase originally presented to us. We would like to know if we can pay the shortage by credit card (which would demand a payment considerably less than the bank) and is it normal for estimates to be that far off so that an increase in amount of mortgage payment should be so high?
We are retired and on fixed income, so any increase takes it’s toll!
I’m 90% sure that we used an escrow account when paying our attorney’s fees. We put money into the account as we were able to save it, and the attorney took the money as payment once she had completed her services.
What you describe is an escrow account, though different than a mortgage escrow account.
The escrow account for my mortgage contains both a Shortage and a Reserve which adds about $7,500 beyond what the bank will payout for the coming year. The insurance and tax has already been set, so it seems to me that the bank is taking far more then is needed? Do I have any recourse to hold onto my own money?
How do you mean a shortage and a reserve?
It does seem like that is a lot to be holding beyond your payment. Have you tried calling the bank to see what the situation is and why they are holding so much in your escrow? Could it be that taxes will be due soon and that money will me used for that? When taxes are due by us, the lump sum due is taken out of our escrow, at least for things like school taxes.
We were issued a check for excess escrow after the insurance and taxes had been paid for the year.
If you pay extra per month going towards your excrow, will you get the surplus after taxes are paid? Or will it carry over to the next year? It can be a nice incentive @ the end of the year, especially if you always owe on state & federal taxes!
Ideally, I think you would only want what is needed to be put into escrow. Otherwise they are just holding the money for you when you could be holding it yourself and earning money on it.
As for what the escrow company does with it, you would have to call up your company and ask them their policy for extra money.
And keep in mind, the taxes paid through your mortgage escrow are different from your state and federal taxes. What gets paid are you local taxes. So if you always owe on state and federal then you can either adjust your withholding or put money aside in a fund to pay what you owe (though you should consult a tax pro to make sure you are paying what is required during the year).
I had the mortgage company send me a check for my excess escrow. Only issue with that is that I’m in the military and was on deployment. If you don’t cash the check within 90 days then the check is forwarded to the state in which you live. Just make sure to cash the checks when and if you get them.
Can you escrow for taxes and homeowners or condo associations in the same account or must they be in seperate accounts?
I am going to do an Fha streamline refinance, and my broker is asking for 13 months homeowner’s insurance and 8 months property taxes upfront to fund the new escrow. I thought the standard was 3 months, and I told him that. But he keeps telling me that they need to “pre-loan” the account. Are you familiar with this?
Good post on a topic that confuses many home owners (and buyers). I would just add that ‘escrowing’ as we call it…for taxes and insurance is not required for conventional loans – although most lenders will punish you a little with higher fees if you don’t. Government loans (FHA) require that the borrower escrow for taxes and insurance…
GLEN, I’m confuse with my home mortgaged escrow and how it determines my mortgage payment going up or down I want to know how to make it go down and stay down these mortgage companies are tricky and like you said you got to stay on them where can I go and learn more about my mortgage escrow and paying lower payments for my mortgaged.
We are having the exact same problem. Our mortgage/escrow keeps going up. Our flood insurance went up, we did not want to have an increased mort/escrow pmt so we sent them a $900.00 check to put into the escrow. Now they want another $55.00 more amonth to cover a two year escrow acct. This doesn’t make sense. I am prepared to have my own “escrow account” just as I have a separate mortgage account. Instead of paying the bank, I will make the payments. CAN I DO THIS?? not getting anywhere on this automated phone system and the people I talked to were not helpful…
We didn’t open an Escrow account when we orhinly purchased our home. This year our city taxes were paid late and our county taxes ended up being paid for by our mortgage company. We got a letter from the bank stating that they opened an escrow account for our loan and now our mortgage payments went up every month. We were only late paying one tax note. Can the bank force us into an escrow account like this? I’m so confused and there is no way we can afford these new monthly payments. PLEASE help
My escrow is over the limit one year and under the required amount the next year. The mortgage company always spreads the shortages over a 12 month period. Would I be better off paying ahead on the principle or the escrow? I am a senior citizen and need to watch every penny and know the amount of taxes, etc is subject to change yearly.
I NEED TO KNOW WHERE MY ESCROW MONEY GOES ALL YEAR, MY STAEMENT DOESN’T SHOW ANY THING ABOUT IT ACCURING INTEREST WHO GET THE INTEREST?
I have a mortgage escrow instead of a mortgage loan. Can this be refinanced to lower the payments, because this escrow was not set up to pay taxes or insurance just the mortgage?
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