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An escrow account is a bank account used by the lender to pay your property taxes and insurance. Monthly payments are made into the escrow account at the same time that payments are made on the mortgage. The lender then uses the money in the escrow account to pay the property taxes and homeowner’s insurance when they are due.
Advantages of an escrow account
- Built in savings account: Property taxes are usually due once or twice a year, so after not making tax payments for long periods of time, it can be easy to not have the cash needed to pay that bill when it rolls around. An escrow account ensures that you have the necessary funds to pay the bill when it’s due.
- Less stress for you: Your lender is the one responsible for paying your tax and insurance bills on time and in full, so if any errors are made on that, your lender is responsible for correcting the mistake and paying any penalty fees that may have been incurred.
- Better mortgage terms: Many lenders require borrowers to agree to an escrow account before obtaining a mortgage. An escrow account is one way that lenders protect their investment, so often times an escrow account comes along with the best rates and options for the mortgage.