An escrow account is an account used to collect and hold funds to pay property taxes and homeowner’s insurance premiums. Escrow accounts are usually set up by the mortgage company when a home mortgage is taken out. Money is deposited into an escrow account each month and then used to pay annual taxes and insurance.
The monthly mortgage payment includes an amount for property tax and insurance on top of what an individual pays in principle and interest on their home loan. The mortgage company pays the taxes and insurance premiums from the escrow account. The mortgage company also examines any changes in cost and reexamines the escrow amount accordingly. The borrower should receive a yearly statement on their escrow account. The amount put into your escrow amount each month depends on the cost of taxes and insurance annually.
Here is an example of how monthly escrow accounts are calculated if your annual real estate tax is $2,400 and your annual property insurance is $1,200:
$2,400 divided by 12 months equal $200 per month.
$1,200 divided by 12 months equal $100 per month.
Total amount of taxes and insurance each month is $300.
This amount would be added to the principle and interest of your loan. The funds in the escrow account will collect until taxes and insurance are due.
There are many advantages to having an escrow account. An escrow account helps an individual to manage their funds. Instead of having to pay a lump sum of money, payment is made through monthly payments. It is much easier for most people to pay $200 per month into a forced savings account instead of paying $2400 at once. An escrow account is also useful because an individual does not have to worry about remembering to pay their taxes and insurance. The mortgage company does it for them. Also an individual’s taxes and home insurance will be paid on time which prevents late fees or cancellation of their policy. Your payments have already been budgeted for you and the money is waiting and available in your account. When the bill is due, the escrow account takes care of everything for you. It is nice not to have to remember payment dates and amounts. Escrow accounts are also required for North Carolina VA loan, Georgia VA Loan, pretty much all VA loans, and FHA loans as added protection for the lender.
