When you start your home search, you will hear a lot of talk about mortgages and escrow accounts. So, what is an escrow account, and do you have to have it?
An escrow account is a 3rd party between the homeowner and the bill holder. This can include homeowners insurance, city taxes, and state taxes. This is an account attached to your mortgage. Most times it is mandatory.
Every month you will get your mortgage bill. On it, you will notice that some of your payment goes to principal, some to taxes, and some to escrow. You are making payments every month to this escrow account held by the bank in order to pay your bill when it is due. When the bill is due, your mortgage company will send the payment. This is a savings account, set up by the mortgage lender, to ensure these bills get paid on time.
The benefit of having an escrow account built into your mortgage payment is that you don’t have to remember to set aside the money every month, or remember when the bill is due. It is a forced savings account for you, and prevents you from having to pay one lump sum when the bill is due.
There is really only one downfall of having your mortgage company handle your escrow account. If you were to put the savings in your account yourself, you could earn interest on it until the bill is due. A mortgage can be confusing, and if you are ever unsure of something listed on your mortgage statement, it is always best to ask.