Mortgage Payments and Escrow

If you've just purchased your first home or plan to buy soon, you may not be familiar with mortgage escrow accounts. Since most borrowers pay for home insurance and property taxes through an escrow account, here's a refresher on escrow basics.

An escrow or impound account is set up and managed by your mortgage servicer. It can help homeowners manage larger property-related expenses like taxes and insurance premiums. Since these are due annually, an escrow account makes these bills easier to manage by dividing them into 12 monthly payments. Every month, homeowners pay around 1/12th of their home's annual taxes and insurance into an escrow account.

Most homeowners find that their escrow account simplifies budgeting, especially as they won't have to pay an entire year's tax bill or insurance premium at one time. In addition, your mortgage servicer will pay these bills on your behalf, so you won't have to watch your mail for these bills. This eliminates the risk of being charged additional fees for late payments.

After you've been in your home for a year, your mortgage servicer will conduct an annual escrow review or analysis. This review compares your escrow account's annual balance to your future annual taxes and insurance premiums. If these have become more expensive, your escrow payments may be increased to cover them. However, if your escrow analysis finds that you have surplus funds in your escrow account, you may receive a refund.

Source: Consumer