Escrow Account

An Escrow Account is a trust held in the name of a borrower that is used to pay obligations such as private mortgage insurance, homeowner's insurance, and real estate or property taxes.  Escrow accounts are usually held by a mortgage company, since they have a vested interest in making sure that all insurance premiums and taxes are paid on the property.

Since the escrow account monies are collected monthly, along with the mortgage payments, this makes it easier for the homeowner to budget for the amounts owed.  Instead of the homeowner worrying about payment of quarterly property taxes, the money is simply paid by the mortgage company to the tax collecting agency from escrow.

Because mortgage companies are permitted to control escrow accounts, this lowers the risk of non-payment on these obligations or insurance shortfalls.  This mechanism effectively lowers the overall risk of the mortgage, enabling the lender to offer lower interest rates to the consumer.

The amount of money needed in an escrow account is constantly calculated, and evaluated, by the mortgage company.  As property taxes and insurance costs change over time, adjustments are made to mortgage payments to account for shortfalls or overages in the escrow account.