What is an escrow account?

When you purchase a home, you’ll probably want what’s called an escrow account. This is an account from which your home’s property taxes and insurance premiums automatically get paid. Escrow can be beneficial in that it helps you spread insurance and tax expenses evenly over 12 payments. To better understand an escrow account and the role it plays in the purchase of your home, here are some frequently asked questions and answers.

How does an escrow account work?

Typically, every month you send us a mortgage payment. While a portion of that payment is applied to the principal and interest on your mortgage, a portion also goes into an escrow account. We will get copies of your property tax bills and insurance premiums and pay them using the money that’s been accumulating in your escrow account.

Why do we take care of these payments?

This helps us ensure you pay your taxes and insurance on time and in full. If you don’t pay your property taxes, a lien could be put on the house, making it difficult to sell. Or if your house burns down and you’ve not paid the insurance, we would be left with no collateral.

What about new home construction?

Initially, property taxes are based on land value. They go up when your home’s value is taxed too, so it’s a good idea to set aside extra money toward escrow.

Does your escrow payment go up?

Since your property taxes and insurance premiums may change—most likely increase—over time, we will periodically review your escrow account and project what’s needed to ensure there is enough to pay your bills. Federal law prohibits lenders from requiring more than two months expenses in escrow.

What’s an escrow shortage?

This happens when your escrow account is projected to be short of funds over a 12-month period. You have a choice to pay the difference in full or have it spread out over 12 months.

What’s an escrow overage?

This happens when your escrow account is projected to have more funds than needed to pay your taxes and insurance premiums over a 12-month period. In this case, you are likely to get a refund check for the amount.

Are escrow accounts involved with making an offer on a home?

When you make an offer on a home, you and the seller enter into a contract that stipulates the final sale price and down payment amount. But that contract does not obligate you to purchase the home since the home appraisal and inspection may reveal problems with the house. To show your offer is earnest or “in good faith,” you give earnest money, which is placed in escrow and held for safekeeping by a neutral third party. Having the money in escrow protects you and the seller until the deal is closed.

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