How Your Home Escrow Account Works

Buying a home for the first time is a big step.  There are number of items to consider including figuring out how your home escrow account works.

If you recently purchased your first home, you are probably wondering what on earth an escrow account is and how does it work. Well, escrow accounts are also known as “impound accounts” or “reserve accounts” and are basically a savings account set up by your lender. The account is set up to ensure you will have enough money on hand to pay a number of fees, ranging from homeowners insurance, premiums, different taxes, and more.

An escrow accounts main goal is to help you protect yourself any lapses in tax liens or insurance policies. If you are still unsure about escrow accounts, then read below as we dig a little deeper into escrow accounts.

Here’s how an escrow account works:

Funding

Mortgage payments can be broken down into four parts: principal, interest, taxes, and insurance. The money that actually enters your escrow account comes from your monthly mortgage goal. While the principal and interest portion of your mortgage payment are sent directly to the lender, the taxes and insurance piece of each of your mortgage payments head into your escrow account. Your escrow account grows and grows until taxes and homeowners insurance payments are due to be paid. Then the account automatically disburses the money saved.

Closing Time

No we’re not talking about the awesome 90’s rock song, We’re talking about the closing of your new home. Occasionally you may be required to pay a full year’s worth of homeowners insurance and taxes as a deposit along with your closing costs. This means you will be ahead of schedule, as your escrow account will continue to accrue savings throughout the year. With payments from your reserves paid out annually, you will continually be ahead on your payments.

Maintenance

There should not be much maintenance with regards to your escrow account on a yearly basis. The lending institution that you established your mortgage with is solely responsible for making sure the payments from your escrow account are made in a timely manner. If the lending institution makes a mistake with regards to your escrow account they should pay the late penalties. As well, you have the option to review the escrow account for any errors made by the lending institution by receiving a statement of payments made once per year.

Fluctuations

One of the facts of life is that things change and your escrow account is certainly no different. Most mortgage lenders conduct an escrow account analysis once a year to determine the state of your escrow account. If things have changed with regards to your tax and insurance payments, you may have excess in your account or a deficiency. If you have an excess of cash in your account most lenders will mail you the sum when they send your escrow analysis statement. If you are short you will be asked to make up the sum in payments over the next year or in a lump sum payment. 

If you have more questions, ask your lender or Realtor. Understanding the process is important for everyone in the home buying process.

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