What is Escrow? Should You Use It?
What is escrow? Escrow is a legal arrangement where one party places funds into an account to be delivered to another individual or business after certain conditions are met. The account is overseen and funds are transferred by a neutral third party.
If you have difficulty saving large sums to pay these bills on your own each year, then having an escrow account may help. Since you’ll be paying a small amount toward the costs along with your monthly mortgage payment, you’ll be able to build the cost into your budget.
In real estate purchases, escrow accounts are used for buyers to deposit funds for homeowners insurance and property taxes. By placing funds in escrow, the lender is assured that these costs are covered.
Money can be deposited into escrow in two ways:
- Once before closing on the home to cover such expenses for the first year
- Over the life of the loan with part of your monthly payment going into the escrow account each month.
The escrow administrator will then be responsible for making the appropriate tax and insurance payments from the account on time.
Learn more about escrow accounts and mortgages at our online Mortgage Center.