Mortgage Escrow Accounts

Mortgage escrow accounts are simply accounts which are set up by lenders to hold an amount of money that is used to pay costs associated with your mortgage and owning your home, such as Private Mortgage Insurance premiums, homeowner’s insurance premiums, and property taxes. The lender then uses this account to pay these expenses throughout the year. Although you will probably pay a lump sum into the account to start the account when you obtain your mortgage, you will then pay a monthly ‘fixed’ amount to maintain a proper balance that the lender uses to pay the expenses.

Although some of these expenses are monthly expenses, such as Private Mortgage Insurance and homeowner’s insurance, others are yearly or quarterly, such as property and school taxes. The lender manages the account so that there is enough money to pay these larger yearly payments so that you don’t have to come up with a large sum of cash to pay these larger, less frequent bills. You pay monthly as part of your mortgage, the lender pays the bills as they come.

The lender is allowed to keep a reserve amount in the account to make regular payments and cover unexpected payments or increases in premiums. If your property taxes go up or are billed early, the reserve is there to cover that cost. If an unexpected cost or other situation depletes the account below the reserve level, the lender is also permitted to ‘charge’ you shortage payments to rebuild the balance. This is normal, but is one way that your monthly mortgage payment might change from month to month. It’s also a reason to be careful not to stretch yourself financially when buying a home – that ‘fixed’ monthly mortgage payment isn’t necessarily set in stone.

If you sell your home or change mortgage providers, the balance, after all remaining expenses are paid up to date, belongs to you. You can expect a check at or after closing. However, if you're buying a new home or obtaining another mortgage, you can expect to pay again to start another escrow account, so it's not necessarily time to go on a spending spree!

Mortgage escrow accounts are a simple way for homeowners to manage their related home ownership expenses – the lender does it! – and the lender is secure in knowing that the asset (your home) is protected and important expenses are paid.