Understanding Escrow Accounts

Mortgage escrow accounts are special accounts that are set up to hold money to pay for property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and possibly other escrow items.

Escrow accounts ensure that these items are paid in a timely fashion. They are a guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.

It also guarantees that bills are paid on time. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year.

Unexpected increases are taken care of. It is the responsibility of the mortgage company to allow for possible increases in insurance premiums or taxes.

Mortgage companies typically cover shortages when tax or insurance payments increase. It is common for mortgage companies to pay taxes and insurance premiums when they are due even though all the money for these bills has not yet been collected from the homeowner.

Mortgages have lower rates and down payments because of escrows. Escrows protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.

Local governments save money. Escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.