If you have a mortgage, then chances are you’ve heard the word escrow thrown around a time or two. But what is it exactly?
An escrow account is a helpful tool built into your mortgage. It allows for funds to be collected monthly to pay for your homeowner’s insurance and/or property taxes. By your mortgage collecting escrow, it ensures that your insurance and property taxes are paid in a timely manner. The benefit to you is you don’t have to worry about fronting hundreds or thousands of dollars all at once for your homeowner’s insurance or property taxes.
The formula is typically simple for finding the amount owed. Let’s say both insurance and taxes are escrowed from each monthly payment. The monthly payment is found by taking the total amount paid to both insurance and taxes for the year and then divided by 12. (The 12 is for 12 months.) That’s it! That would be your monthly payment in addition to your mortgage! Please keep in mind, some lenders may use another calculation that varies slightly and is also permitted by the law. Be sure to contact your lender if you have further questions as to how your escrow is calculated.
Occasionally, your escrow payments may increase or decrease. If that happens, either your insurance or taxes have changed. This will affect what you pay monthly. In most loan types, this is the cause of increase or decrease for monthly payments.
All in all, escrow accounts allow for your insurance and property taxes to be paid on your behalf without much extra work on your end!
Researched and created by Rachel Mersinger
