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What is an escrow account on a mortgage?

Escrow account imageYou might be surprised to learn that the term "escrow" is used for two different purposes. In some areas of the country, a third party (escrow company) secures the home buyer's earnest money deposit and works with the seller and real estate agent(s) to complete the sale. The escrow company may provide the title insurance policy and arrange the settlement between the home buyer and seller.

Mortgage escrow account

The word escrow account can also be used for the mortgage escrow accounts, which are specific holding accounts for homeowner's insurance premiums, property tax payments, and mortgage insurance premium, if applicable. Flood insurance premiums are also included. The term mortgage escrow is a fancy name for a savings account. With each mortgage payment, the lender collects 1/12 of the annual real estate taxes, 1/12 homeowner's insurance and mortgage insurance (if applicable).

The lender or servicer holds the payments in the escrow account until the bills come due.

Lenders prefer a mortgage escrow because a mortgage escrow ensures that the property taxes and homeowner's insurance will be paid on time. Borrowers are also comfortable with this arrangement, because the borrower may not have resources to cover these expenses when they come due.

The amount of money in the account can change over time, because property tax assessments and insurance premiums can go up or down (usually up). If there’s a shortage in the mortgage escrow, the lender will pay the deficiency and will increase the monthly mortgage payment to make up the shortfall.

The lender will mail an escrow analysis statement annually that determines whether the escrow account is overly funded or has a deficiency. The escrow analysis also explains how the monthly mortgage payment will be adjusted as a result of an escrow increase or decrease. Escrow accounts are mathematically calculated and lenders are not permitted to over fund the borrower's escrow account. The federal government does permit a cushion of two additional mortgage payments.

Rotating question markFrequently Asked Questions About Mortgage Escrows

Q. Can I change my homeowner's insurance after closing?
A. You are permitted to change homeowner's insurance companies after closing, provided the lender is notified of the change.

Q. Can I take money out of my escrow account
A. No

Q. Can you borrow money from your escrow account?
A. No

Q. Do escrow accounts pay interest?
A. No federal law requires mortgage companies to pay interest on the escrow account. Your escrow account might generate interest anyway, depending on the state in which you live. Fifteen states require lenders or servicers to pay interest on escrow accounts: Alaska, Connecticut, California, Iowa, Maine, Maryland, Minnesota, Massachusetts, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont, and Wisconsin. But there can be exceptions for legal reasons.

Q. Do I get my escrow money back when I refinance?
A. Yes. Lenders may take up to 30 days to refund the escrow account balance to borrowers whose mortgage loans have been paid off.

Q. Do I need to send my tax bill to my mortgage ompany
A. It's not unusual to have some confusion after settlement where real estate tax bills are mailed. Speak to the settlement company.

Q. Do VA loans require escrow?
A. The Department of Veterans Affairs does not require escrow to be used, but many lenders do. The lender is allowed to set requirements for escrow accounts for the payment of property taxes and/or other costs required as part of a VA loan.

Q. Do you get escrow back?
A. The escrow is refunded upon the loan payoff or refinance.

Q. Do you get escrow back when selling a house?
A. Yes