What Is Escrow Used for?

An escrow account is used to hold money for specific purposes. The person in charge of the account is an escrow agent, who will release the money according to the terms and agreements established by two or more parties to a contract. Once the contractual arrangements have been met, the escrow agent will distribute the funds. Escrow agents are unbiased and have no interest in the agreements and they have no ties or relationship to the parties of the agreement.

Taxes and Insurance

Homeowners are sometimes given the opportunity to have an escrow account, offered by their lender, to pay taxes and insurance. If your lender pays your taxes and insurance, a portion of your payment goes to the escrow account every month to accumulate toward annual premiums. If annual tax payments are $600 and annual insurance is $600, then $100 per month goes to the escrow account, ($600 + $600 = $1,200/12 = $100). When statements are received for taxes and insurance, the lender will send a payment for the entire annual premium.

Risk Reduction

Escrow accounts give homeowners the ability to pay their taxes and insurance on a monthly basis instead of coming up with a lump sum payment all at once. This also reduces the amount of risk that a lender will incur. When taxes are paid on time there is no chance that a lien can be filed against the property for non payment. Some homeowners are not disciplined enough to save money on their own for taxes and insurance.

Insurance Claims

When you have repairs done to your home from an insurance claim, the insurance company's money is sometimes put into an escrow account. The insurance company will do this to make sure the repairs are getting done. They will release a certain portion of the funds to the contractor when a certain percent of the work is complete. Another percentage will be released as more work is done until the entire amount has been disbursed to the contractor.

Interest

In some cases the money in your escrow account can earn interest. If you want to earn interest, your loan must be for a residential property and your loan must have come into existence after January 31, 1983. Another requirement is that the escrow account has to be used for paying taxes and/or insurance. There are other requirements, but these are the most common.

Escrow Analysis

An escrow analysis is performed once a year to see if the proper amount of money is going into the account so that taxes and insurance can be paid. When the tax and insurance statements are received, the mortgage company will pay them even if there is not enough money in the escrow account, which creates a shortage. This can happen if taxes and insurance increased during the year and the corresponding payments to the escrow account did not increase. After the escrow analysis is performed an adjustment to the payments will be made to accommodate the increase in annual premiums for taxes and insurance and to cover the shortage.

References

• Escrow Accounts
• Escrow Analysis