What Are the Functions of an Escrow Account?
When getting a mortgage, your mortgage company will often collect money on top of the principal and interest that is due for the loan. This money goes into a special account that the lender sets up, called an escrow account. The escrow account is used for several purposes that benefit both you and the mortgage lender.
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Pay Real Estate Taxes
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One of the primary purposes of the escrow account is to pay real estate taxes. Local county governments impose property taxes on homeowners every year. With an escrow account, you make one payment to the mortgage lender each month and a portion of your payment goes into the account. When your property taxes are due, your mortgage escrow account company will send the appropriate amount of money to pay the taxes on your behalf.
Pay Homeowner's Insurance
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Another purpose of the mortgage escrow account is to pay your homeowner's insurance. Your homeowner's insurance is required so that you are financially protected in case your home is damaged. As long as you have a mortgage, your mortgage company will require you to have this type of insurance. When your insurance premium is due, the escrow company will send the appropriate amount of money to pay it for you. This ensures that your home will be repaired if it sustains any significant damage.
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Level Out Costs
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One of the primary purposes of the escrow account is to level out the costs of your housing. Instead of paying a lower payment each month for your principal and interest, this forces you to make a slightly higher payment each month. By doing this, you get to avoid having to come up with a lump sum of money to pay your homeowner's insurance and your property taxes when they are due throughout the year.
Protect Mortgage Lender
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The escrow account also helps protect the mortgage lender. When you fail to get homeowner's insurance or to pay your property taxes, it puts the mortgage lender in a negative situation. If your home is destroyed in a fire without homeowner's insurance, it could lead to a default on the loan. If you do not pay your property taxes, it could eventually lead to your house being taken by the county in which you live. By collecting this money in small increments each month, it takes some of the risk away for your mortgage lender.
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