Where Does Escrow Go

posted 5/9/2016 in Mortgage

What is escrow

If you’ve never worked in the mortgage industry, the word escrow probably doesn’t mean anything to you. But if you are looking to buy your first home, it is a word you should probably know.

What is escrow?

In order to effectively and wisely manage your mortgage and finances, it’s important to really understand what an escrow is and how it works. Escrow is money collected as part of your monthly mortgage payment that is used to pay your property taxes and homeowner’s insurance. The company you make your mortgage payment to, or your mortgage servicer, is the company that collects your escrow. Make sure you know who your mortgage servicer is; this can change from the company who you received your loan from.

How does escrow work?

Here’s how escrow works. An escrow account is set up when you close your loan. The three parts that make up your monthly mortgage payment are the principle, interest, and your escrow (property taxes and insurance). How much your escrow will be per month is based on your current property tax rate and your home’s yearly insurance premium, divided by 12. Since tax rates and insurance premiums can fluctuate, by law lenders can keep enough money in the account to cover two months’ worth of payments in the escrow account to cover any future increases. (Typically, that cushion is part of the loan closing costs.)

What's a benefit to escrow?

The nice thing about having an escrow is the shift of responsibility from you to your mortgage servicer to make your payments. Because it’s already part of your monthly mortgage payment, you can easily budget, knowing the set amount you’re going to pay every month. 

If you are still unsure about escrow and have more specific questions, we'd love to help clarify things for you! Sign up for a free consultation with one of our home loan experts and they can help walk you through the process and answer any questions you may have. Or if you think you're ready to take the next step, complete our short mortgage form to start the purchase process now!

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