What is Escrow?

By simple definition, an escrow is a deposit of funds by one party to another upon completion of a particular condition or transaction.

Mortgage escrow accounts are special accounts set up in which a sum of money is held to pay your property taxes and insurance, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items.

They ensure that these items are paid in a timely fashion and guarantee that there is always enough money to pay these bills when due.

The homeowner thus avoids the risk of lapsed insurance coverage or delinquent taxes.

With escrow accounts, homeowners have peace of mind and not worry about coming up with lump sum payments of different due dates throughout the year.

Better yet, escrow accounts take care of unexpected increases. The mortgage company has the responsibility to allow for possible increases in tax or insurance premiums, and typically cover shortages when tax or insurance payments increase. It is common for mortgage companies to pay due taxes and insurance premiums even though all the money for these bills has not yet been collected from the homeowner.

Mortgages have better rates and downpayments because of these escrows that protect the interest of investors of home mortgage loans by making them more attractive and secure as investments.

In addition, escrow accounts also benefit local governments by providing a more efficient, less expensive means of tax collection.

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