What is an Escrow Account?

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Real Estate

This week I'll discuss a question I have received twice in the last few days, which was "What is an escrow account?"

Let's break it down and learn more!

According to Wikipedia, Escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage) Escrow is an account separate from the mortgage account where a deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property taxes and insurance.

When you are financing a home through a mortgage such as FHA, VA, Conventional or even USDA, (more on types of mortgages later in the series) the lender will establish an escrow account for you where they collect funds to pay your taxes and insurance during the life of your loan. Every time you write that check to pay your mortgage, a pre-determined amount will go directly to your escrow account. This money will be held for safekeeping until your tax bills and insurance bills are due. The mortgage lender will then cut a check and send it directly to your school district, county and/or state as well as your insurance company.

But, there's more! Once you officially purchase your home (known as settlement or closing), the lender will also take typically a few months pro-ration of your taxes and insurance to establish money in that escrow account. This is all predetermined and you'll have a good idea of what it will be, from an estimated cost sheet that your agent will provide to you prior to even submitting your offer to purchase a home.

Escrow can also refer to the Earnest Money Deposit (EMD) check, which is a deposit the buyer puts down as good faith when purchasing a home. The amount will vary based on the purchase price of the home. This money is then held typically by the broker who listed the property in an escrow account, where it sits until the settlement of the property. At that time, you'll receive the money back as a credit towards your mortgage and closing costs. 

As you can see, having an escrow account for your taxes and insurance makes life easier for you. It's fewer bills that you have to worry about paying on time!