Home Home Buyer Home Seller Per Diem Interest Credit report Search
Real Estate Tax first-time Programs Title Insurance Transfer Tax Calculators Interest Rates
FHA Loan VA Loan USDA Loan Conventional Loan Jumbo Loan Reverse Mortgage

Please Share

What is an escrow account on a mortgage?

Escrow account imageYou may be surprised to learn that the word "escrow" has two distinct meanings. In certain areas of the nation, a third party (escrow firm) protects the house buyer's earnest money deposit and coordinates the transaction with the seller and real estate agent(s). Additionally, it may offer title insurance and assist in settling the transaction between the buyer and seller.

Mortgage escrow account

The term escrow account may also refer to mortgage escrow accounts, which are designated holding accounts for homeowner's insurance premiums, property taxes, and, if appropriate, mortgage insurance premiums. Premiums for flood insurance are also included. Mortgage escrow is a euphemistic word for a savings account.
With each mortgage payment, the lender receives one-twelfth of the yearly real estate taxes, one-twelfth of the annual homeowner's insurance, and one-twelfth of the annual mortgage insurance (if applicable).

Payments are held in the escrow account by the lender or servicer until the bills are due.

The term escrow account may also refer to mortgage escrow accounts, which are designated holding accounts for homeowners' insurance premiums, property taxes, and, if appropriate, mortgage insurance premiums.

Premiums for flood insurance are also included.

Mortgage escrow is a euphemistic word for a savings account. With each mortgage payment, the lender receives one-twelfth of the yearly real estate taxes, one-twelfth of the annual homeowner's insurance, and one-twelfth of the annual mortgage insurance (if applicable). Payments are held in the escrow account by the lender or servicer until the bills are due.

Lenders favor mortgage escrow because it guarantees timely payment of property taxes and homeowner's insurance. Borrowers also feel secure under this arrangement, since the borrower may lack the means necessary to pay these costs when they become due. The balance in the account may fluctuate over time as property tax assessments and insurance costs fluctuate (usually up). If there is a deficit in the mortgage escrow account, the lender will make up the difference by increasing the monthly mortgage payment.   

Annually, the lender will send an escrow analysis statement to see whether the escrow account is adequately funded or has a deficit. Additionally, the escrow analysis shows how an escrow increase or reduction would affect the monthly mortgage payment. Escrow accounts are computed mathematically, and lenders are not allowed to overfund the escrow account of a borrower. The federal government does allow an extra two mortgage payments as a buffer. 

Rotating question markFrequently Asked Questions About Escrow Accounts for Mortgages

Q. Can I modify my homeowner's insurance policy once the transaction is complete?
A. You may change homeowner's insurance providers after closing as long as the lender is informed.

Q. May I withdraw funds from my escrow account?
A. No.

Q. Is it possible to borrow funds from your escrow account?
A. No.

Q. Are escrow accounts subject to interest?
A. There is no requirement under federal law for mortgage firms to pay interest on the escrow account. Depending on the state in which you reside, your escrow account may earn interest regardless. Fifteen states, including Alaska, Connecticut, California, Iowa, Maine, Maryland, Minnesota, Massachusetts, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin, compel lenders or servicers to pay interest on escrow accounts. However, there may be legal exceptions.

Q. Do I get a refund of my escrow funds if I refinance?
A. Yes. Lenders may wait up to 30 days to return the amount of an escrow account to borrowers who have paid off their mortgage loans.

Q. Is it necessary for me to submit my tax bill to my mortgage company?
A. It is not uncommon for some misunderstanding to occur after settlement when real estate tax invoices are issued. Speak with the settlement firm.

Q. Are VA loans subject to escrow?
A. While the Department of Veterans Affairs does not mandate the use of escrow, many lenders do. The lender may establish criteria for escrow accounts to be used to pay property taxes and/or other expenses associated with a VA loan.

Q. Do you get your escrow funds back?
A. The escrow account is reimbursed upon loan repayment or refinancing.

Q. Do you receive your escrow money back when you sell a house?
A. Yes