Real estate purchasers may place a deposit into an escrow account prior to purchasing a property.
Once you purchase the property, however, you may have to pay amounts into escrow as part of your mortgage loan obligations. In that regard, an escrow account is a trust account established in your name to pay obligations such as property insurance and property taxes on real estate. It may be set up when you take out a mortgage. You may pay these amounts along with your mortgage payment each month.
The lender will determine the monthly amount by adding your estimated property insurance, property taxes and other items that may be paid on an annual basis and dividing them by 12. The lender will then pay the bills for you when they are due.
Escrow accounts are set up to guarantee that items such as insurance and taxes are paid in a timely fashion. They ensure that enough money is available to pay for these items when they are due so that you avoid the potential of lapsed insurance coverage or unpaid or late taxes.
Escrow accounts make it easier to budget and pay real estate expenses by spreading the cost over 12 months. That way, you don’t have to worry about raising funds for or making large lump sum payments during the year.
Special assessments, such as supplemental taxes, typically are not included in amounts that are escrowed.
Escrow accounts decrease mortgage rates and down payment amounts because they lower the risk to the lender and the lender’s investors that taxes and insurance payments will not be made.