How Do Escrow Accounts Work?

When you obtain a mortgage loan from a bank, you can also set up an escrow account that helps you pay your property taxes and homeowner’s insurance premiums on time. Although these costs are paid on an annual basis, your lender will require you to pay a monthly fraction towards each cost and accumulate the balance in your escrow account. This ensures that these expenses get paid on time every year.

Escrow accounts minimize the risk if you fall short of your homeowner financial obligations of paying your property taxes or insurance company. Escrow accounts smooth out the non-mortgage costs of owning a home.

Although escrow accounts conveniently allow lenders to pay the relevant taxes and insurance premiums on your behalf, they do have some drawbacks for the borrower. Lenders often require you to keep a minimum balance in your escrow account to protect against any unexpected cost increases from the county assessor’s office or the insurance company. The usual rule requires a minimum of two months of expenses on your mortgage escrow account, though the limit can be higher. Lenders review your escrow account once a year to make sure that the calculated payments are keeping up with costs.