You may have an escrow account if you’re a homeowner with a mortgage. Your lender uses your escrow balance, or the funds available in the escrow account, to pay for certain expenses, such as your home insurance premiums and property taxes.1
Here’s what you should know about escrow balances.
An escrow account is a special type of account that your mortgage lender or loan servicer sets up. The account’s purpose is to act as a neutral third party that receives and distributes funds based on a contract. In the case of a home purchase, your account will be a third party between the buyer and the seller of the home.
When you make your monthly payment, the lender puts some funds aside into an escrow account. Your lender then uses these funds to cover specific types of expenses you may have as a homeowner, such as property taxes, home insurance premiums, flood insurance, and federal loan charges.
Escrow accounts offer homebuyers flexibility. The escrow account will hold the homebuyer’s “earnest money,” which will go to the seller once the buyer signs the contract or cancels the transaction. This gives the homebuyer a safety net to ensure the seller follows through on any agreed-upon repairs, as the escrow money won’t be released otherwise.
Homeowners typically pay taxes and insurance twice a year. Having an escrow account can make budgeting for these large expenses easier. An escrow account allows you to split the payments into smaller amounts rather than paying lump sums to your tax collector or home insurance company.
Your mortgage lender or loan servicer manages your escrow account and uses the funds to pay property-related expenses on your behalf. A lender or servicer will often require you to pay your property taxes and home insurance through an escrow account as part of your mortgage agreement.
This helps the lender ensure that these mandatory bills are paid on time. In certain states, the law may even require escrow accounts to be used for payments. If you’re unsure who your loan servicer is, check your mortgage statement or coupon payment book for the company’s name.3
Yes. It’s normal for both property taxes and home insurance premiums to fluctuate from year to year. As a result, your total monthly mortgage payment to your loan servicer or lender may increase or decrease.4 You’ll likely also be required to keep a minimum balance equal to at least two months of escrow payments in your account.
Your lender must conduct an escrow analysis when it opens your escrow account and then every year after the account is open. This ensures you have enough money in your account to cover property taxes and insurance expenses.2
A couple of different types of escrow balances are available, and you may have more than one type of escrow balance at the same time. Here, you can learn more about each of the different escrow balance types.
Every year, after completing an escrow analysis, your mortgage servicer must provide you with an annual escrow account balance statement. The statement must include either the initial escrow account statement or the previous year’s projection, along with a detailed account history that shows any activity in the escrow account computation year and projected activity for the next year.
It must also include the following information:
Current and past year’s monthly mortgage payments
Total funds paid into and out of the escrow account in the last year
Escrow account balance at the end of the year
Explanation of how your lender will handle a surplus, shortage, or deficiency
Any reasons why the estimated low monthly balance wasn’t reached, if applicable
You may also be able to view your current balance if your lender has an online account portal.5
Fifteen different states require lenders to pay interest on escrow accounts, though legal exceptions can bar the paying of this interest in some cases. And if you’re able to earn interest off your escrow account, expect the amount you earn to be nominal and not a long-term investing strategy.
And if you don’t live in one of these 15 states, your lender probably won’t put your escrow into an account that earns interest.
Shopping around gives you the best chance to find a lender that will allow you to accrue interest on your escrow balance.
Your lender or mortgage servicer must use escrow accounts to pay certain types of bills, such as your property taxes and homeowners insurance. While you’re responsible for contributing funds to an escrow account, only the servicer can access these funds. But if the amount in your account exceeds the necessary expenses, you may be eligible for a refund.
The mortgage servicer will perform an escrow analysis and identify these excess funds, and the refund will come to you, typically in the form of a check.
Your escrow account won’t be affected if you decide to switch home insurance companies, but you must notify the lender of the switch. Sometimes, your new insurance company may contact your lender and provide a copy of your new premium bill and proof of insurance on your behalf.
If your new insurer doesn’t manage the paperwork, you can let your lender know directly. You’ll likely have to inform them in writing that you’ve canceled your old policy and send them a copy of your new policy’s declarations page.
Escrow can be a confusing concept. This additional information can help you understand more about how escrow accounts work.
An escrowed mortgage splits each payment into three components. The first two portions go toward your principal and interest. The third portion goes to your escrow balance. This balance will pay your taxes and insurance. Continue making your monthly mortgage payments and your escrow balance will take care of itself.
Perhaps. If the amount in your escrow balance exceeds the necessary expenses, your lender could issue you a refund. In most cases, this refund will come to you as a check.
It’s possible for your escrow balance to run out before your bills are paid. This commonly happens if your taxes or insurance rates increase dramatically. If the balance is depleted and costs remain, those costs will then be split over the next 12 mortgage payments.
The money in your escrow account belongs to you, the policyholder, and is used to pay for the insurance and tax expenses of your monthly mortgage payment. If the amount of money in the account exceeds the funds necessary to pay these bills, you’ll be issued a refund. It’s also possible to earn interest on your escrow account funds in 15 states.
At Insurify, our goal is to help customers compare insurance products and find the best policy for them. We strive to provide open, honest, and unbiased information about the insurance products and services we review. Our hard-working team of data analysts, insurance experts, insurance agents, editors and writers, has put in thousands of hours of research to create the content found on our site.
We do receive compensation when a sale or referral occurs from many of the insurance providers and marketing partners on our site. That may impact which products we display and where they appear on our site. But it does not influence our meticulously researched editorial content, what we write about, or any reviews or recommendations we may make. We do not guarantee favorable reviews or any coverage at all in exchange for compensation.
)
15+ years in content creation
7+ years in business and financial services content
Featured in
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
)
)
)
)