Escrow Accounts

If you put less than 20 percent down on your new home, you may be asked by your lender to start what is known as an escrow account. An escrow account is like a savings account where a mortgage lender places your money and holds on to it in order to pay certain bills.

There are some common annual charges that you are responsible for when you own a home. Two of the most common where money is held in an escrow account are to help you pay your property taxes and your homeowner’s insurance.

Property taxes are assessed and paid annually and can be substantial depending on where you live. This can present a large unexpected charge if you get your bill and must pay it within several months. An escrow account helps you save the money by taking an amount out of your total monthly payment each month and setting it aside to help you pay the bill.

Your homeowner’s insurance works the same way. It is usually an annual or quarterly bill that can present a problem if you must pay it in timely manner.

There are several ways that this is accomplished, most often, a portion of your monthly payment is dedicated to these expenses and put into a separate account. The mortgage lender must disclose in writing before you finalize the mortgage loan if they are going to require you to start an escrow account.

They must also send you a statement once a year showing what is paid out of the account and what is left. They will then adjust the payment to make sure there is enough money to cover all of the payments.