What is an Escrow Account When Buying a Home?

When buying a home you may hear the term “escrow account” thrown around. For first time homebuyers it can be confusing. Let’s break it down and explain why escrow accounts are a part of the home buying process.

What is an Escrow Account?

An escrow account is like a savings account managed by your mortgage lender. What’s its purpose? To make sure your property taxes and homeowners insurance get paid on time. When you make your monthly mortgage payment a portion of that payment goes into this account. Then when those bills are due your lender pays them directly from the escrow account.

Why Do Lenders Require Escrow Accounts?

Lenders want to protect their investment. By requiring an escrow account, they ensure that critical expenses like taxes and insurance get paid. This reduces the risk of a homeowner falling behind on these payments which could harm the value of the home or create legal issues.

How Does an Escrow Account Work?

Here’s how it works:

1. Initial Deposit at Closing: When you close on your home part of your closing costs will go toward funding your escrow account. This will give you enough to cover the upcoming tax and insurance payments.
2. Monthly Contributions: Your lender includes an escrow portion in your monthly mortgage payment. Over time this builds up in the account.
3. Payments Made by the Lender: When your property tax or insurance is due your lender pays it directly from the escrow account.

Are Escrow Accounts Required?

In most cases yes—especially if you’re putting down less than 20% or using an FHA or VA loan. But some lenders may allow you to waive escrow if you have a lot of equity or good credit. Just remember managing taxes and insurance on your own requires discipline.

Escrow Account Benefits

• Peace of Mind: You won’t have to save for large lump sum payments like property taxes.
• Convenience: Your lender will pay the bills for you.
• No Late Fees: Since your lender is paying the bills on time you won’t get hit with penalties.

Bottom Line

An escrow account can make homeownership less stressful by taking the taxes and insurance off your plate. As your mortgage advisor I’m here to help you through the process and make sure you understand every step of the home buying journey.

Feel free to reach out if you have questions about escrow accounts or anything else related to buying a home!