What is Escrow?

Jon Shibley, President & CEO, Lenox Financial

The Escrow Account

When you have a mortgage and you have an escrow account, you are required by the lender to put in one half of your homeowners insurance policy and one twelfth of your property taxes, along with the principal and interest part of your mortgage payment, and deliver that amount to the lender.

Tax and Insurance Refinance

Lenders pay your insurance when it is due, so they want to make sure that the account is always current. Since they have not had the benefit of collecting your taxes all year long if you are refinancing, you will need to put in a substantial amount so the escrows can be caught up so the lender can pay the full amount when the tax and insurance bills arrive.

Tax and Insurance Purchase

When you are purchasing, depending on when the taxes are due, it is the same scenario. If the taxes are due in three months and the lender has to pay your full tax bill in three months, the lender will only have three payments by that time. At the time of closing, they generally require you to put the remaining nine months upfront in to an escrow account so that they can pay those taxes and pay the homeowners insurance when the bills come due.

Is Escrow Required?

Escrows are sometimes required and sometimes they are not. It usually depends on the amount that you put down on the loan if the lender will allow you to escrow or not to escrow.

One thing is for sure—if you do have an escrow account, the lender will usually collect enough to cover your taxes and your insurance plus an additional three months in reserves just as a cushion in case your insurance or your taxes go up.