What’s an escrow account (and why is it part of a mortgage payment)?
When you buy a home and make payments on the mortgage loan, part of each payment goes into an escrow account – a special fund managed by your lender for paying your property taxes and homeowners insurance on time. Because your lender makes these payments on your behalf using money you’ve already paid, you don’t need to worry about receiving a large, unexpected home insurance or property tax bill. Putting this money away also assures the lender that their financial investment (a.k.a., your home) remains in good standing with essential bills being paid on time.
In summary, here’s how an escrow account works:
- Collection: Each month, your monthly mortgage payment includes an extra sum that’s deposited into your escrow account.
- Holding: The lender holds these funds and usually a little extra money in case there are unexpected increases to your tax or insurance rates.
- Disbursement: When property taxes or insurance payments are due, the lender pays them on your behalf from the escrow account.
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