How Escrow Works

One of the terms often used during the mortgage process, especially during the closing of a mortgage loan is “escrow” or “escrow account.” Escrow accounts provide for the timely payment of taxes and insurance on your home. This prevents tax liens, loss of property and any lapse of insurance coverage. Every month, the deposit amount for your escrow account will be added to your total mortgage payment. These funds are held and paid out as bills come due. For example, if taxes are $5,000 and insurance is $1,000 for a total of $6,000, you’ll pay $500 (1/12th of the annual cost) into escrow each month. The balance will build until an outgoing payment is made. This amount is determined at closing based on your insurance premium and annual property taxes.

You may be wondering why you pay your lender these payments rather than paying them on your own. This is because an escrow account is for your own protection. For some homeowners, it may be difficult for them to keep up on their insurance and taxes on their own each month. Your lender adds your escrow account payment to your mortgage payment to ensure that every month there is money deposited into the escrow account.

They may request the following documents: