Escrow Account
Definition and meaning of Escrow Account in real estate.
An escrow account is a neutral financial account held by a third party, such as a lender or mortgage servicer, to accumulate and distribute funds for property expenses like taxes and insurance.
In more detail
Lenders typically establish this account to ensure that critical housing costs are paid on time, protecting the lender's interest in the property. Every month, a portion of the homeowner's mortgage payment is directed into this account. When property taxes or homeowners insurance premiums come due, the mortgage servicer pays those bills directly from the accumulated funds.
While this simplifies budgeting for the homeowner, the setup and minimum reserve requirements are governed by federal and state regulations.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Impound account or reserve account |
| Required by | Mortgage lenders, especially for loans with low down payments |
| Typically covers | Property taxes, homeowners insurance, and sometimes private mortgage insurance |
A buyer receives their monthly mortgage bill, which includes their loan payment plus an extra amount for property taxes and home insurance. The servicer puts the extra money into an escrow account and pays the annual property tax bill to the county when it is due.
Frequently asked questions
Can a homeowner cancel their escrow account?
Some lenders allow homeowners to manage their own tax and insurance payments once they reach a specific equity threshold, typically twenty percent, though fees may apply.
Why does my monthly escrow payment change?
Escrow payments adjust annually because local property tax rates and insurance premiums can fluctuate, requiring the lender to adjust the monthly collection.