What is an Escrow Payment?
An escrow payment, also known as an impound or trust payment, refers to a portion of a borrower’s monthly mortgage payment that is set aside into an escrow account. This account is managed by the lender or a loan servicer and its primary function is to ensure timely payment of property taxes and homeowner’s insurance.
How Does an Escrow Account Work?
Each month, a specific amount of your mortgage payment is allocated to the escrow account. These funds accumulate over time and are used to pay property taxes and insurance premiums when they come due, alleviating the burden of making these lump sum payments on your own.
Example of an Escrow Payment
Let’s say you have a monthly mortgage payment of $2,000, which covers principal, interest, taxes, and insurance. Of this amount, $500 is designated as an escrow payment. This $500 is deposited into the escrow account managed by your lender or loan servicer. When your property taxes and insurance premiums are due, funds from the escrow account are utilized to pay those bills.
Benefits of Escrow Payments
- Convenience: It simplifies your budget by spreading out property tax and insurance payments over 12 months.
- Timely Payments: Ensures that your property taxes and insurance are paid on time, avoiding penalties and potential insurance policy lapses.
- Peace of Mind: Reduces the risk of missing important due dates.
Drawbacks of Escrow Accounts
- Funds Accessibility: Money in the escrow account is not readily accessible to the borrower for other uses.
- Over and Under Estimates: Due to changes in tax rates and insurance premiums, your escrow contribution can be adjusted periodically, impacting your monthly mortgage payment.
Frequently Asked Questions about Escrow Payments
Q: What happens if there isn’t enough money in my escrow account to cover my bills?
A: If the funds in your escrow account are insufficient to cover the due payments, you will typically be required to pay the shortfall, and your lender may adjust your future escrow payments to better cover upcoming costs.
Q: Can I handle property tax and insurance payments myself without an escrow account?
A: Some lenders may allow you to waive the escrow account, but this usually requires a history of timely payments and may lead to higher interest rates or additional fees.
Q: How often does my lender review my escrow account?
A: Lenders normally review escrow accounts annually to determine if the current monthly payments are adequate to cover the annual amounts needed for taxes and insurance.
Q: Can the amount of my escrow payments change?
A: Yes, escrow payments can fluctuate based on changes in property tax assessments and insurance premium adjustments. Your lender will notify you of any changes to your payment schedule.
Related Terms: escrow account, mortgage escrow, impound account, trust account, real estate escrow.
