Fast & Easy Explains Escrow Accounts

MARCH 4, 2019

Fast & Easy Explains Escrow Accounts

One of our core beliefs here at Fast & Easy Loans is to share our knowledge and expertise on the home buying process whenever possible. Based off some of the inquiries we receive, escrow accounts are just as confusing as escrow. Please take a look at our article to learn more about escrow accounts.

What is an Escrow Account?

An escrow account, also known as a holding tank, is the account of a neutral agent that holds money while a contract is finalized. In real estate, escrow accounts are used for two purposes. One, to hold a deposit from the buyer while the home purchase is finalized. The second purpose is of an escrow account is so a mortgage lender can collect money for fees associated with homeownership. In this article, we will be focusing on the latter purpose.

Through the use of escrow accounts, a mortgage lender has the ability to ensure that the yearly payments are made on time to each party, such as the county taxing authorities and insurance companies.

What does your Escrow Account Pay for?

In regards to collecting fees associated with home ownership include both property taxes and homeowners insurance. Since taxes and insurance premiums fluctuate, your escrow payment estimate will be adjusted yearly to reflect any changes.

How does an Escrow Account Work?

For starters, it is important to remember the mortgage lender will be managing your escrow account. Mortgage lenders will estimate the price of homeowners insurance premium and real estate property taxes. Each month the mortgage lender will transfer a portion of the total estimated annual cost with principal and interest from your mortgage payment to the escrow account. You may notice that the mortgage lender also charges an “escrow cushion”. This is perfectly legal to ensure the lender has enough money to cover the yearly charges.

At the end of the year, the mortgage lender will adjust the monthly escrow amount based on the actual tax and insurance bills. If the payment falls short of the actual cost, the mortgage lender will spread the difference out over the coming year. If there is excess money after the bill is paid, the lender will refund the money to you.

Can I Remove my Escrow Account?

Yes, but legally, you must own at least 20% equity in your home before you request to your bank/mortgage lender to remove your escrow account. If you put a 20% down payment then you can avoid escrow completely because you will have 20% equity in the home.

If you are considering this as an option, it is important to know the consequences of removing your escrow account. Your annual property taxes will still be due each year. However, without an escrow account, you will become responsible for saving the necessary amount each month to pay off the yearly total. And remember, the annual cost will change from year to year. In addition, it will become your responsibility to know the dates of when your property taxes are due.