What Is an Escrow Account?
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When you buy a house, an escrow account can refer to two different things:
- A third-party account that keeps your earnest money (the deposit you make when you go under contract) safe until closing
- A lender-serviced account that automatically pays for property taxes, homeowners insurance, and similar expenses from your monthly mortgage payments
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How does an escrow account work when you buy a house?
When a seller accepts your offer on a house, you’ll usually put down some earnest money as a good faith deposit. That earnest money will stay in an escrow account until you close on the house or the deal gets called off.
Who owns the money in an escrow account?
A third party — often a title company, real estate brokerage, escrow company, or law firm — creates and manages your escrow account. Neither the buyer or seller can access the earnest money, and the escrow manager will make sure the money goes where it’s supposed to.
If the home purchase goes through, your escrow manager will empty out your earnest money funds at closing time. The money will go toward either your down payment or home buyer closing costs.
How does an escrow account work with a mortgage?
After closing on your house, your lender will create a new escrow account. Each month, your lender will set aside a portion of your mortgage payment to pay your annual property taxes, home insurance premiums, and private mortgage insurance (PMI).
Understanding your escrow account in simple terms
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How much money goes into my escrow account?
Your lender will calculate how much money it needs for your escrow account and reviews that number annually. Your monthly mortgage payment can change year to year if your lender sees that, for example:
- Your property taxes have gone up, and collects more money each month to make up the difference
- You’ve overpaid or your property taxes went down, and issues you a refund
✍ Editor's note
Your lender can collect a little extra money to create an "escrow cushion" for unexpected hikes in expenses. But the escrow cushion can’t account for more than two monthly escrow payments.
What if my escrow account has excess funds?
If your escrow account ends up with more money than needed for taxes and insurance, you may get a refund — usually if you have more than a $50 excess.
When you pay off your mortgage, your lender will refund the money in your escrow account. If you refinance, your lender has up to 30 days to refund your escrow funds.
You can't borrow or withdraw funds from an escrow account.
Is an escrow account required for my mortgage?
Escrow accounts are pretty standard, and many lenders and loan programs (including FHA loans) require you to keep an escrow account until you have at least 20% equity.
If you don't want an escrow account, you should work with a lender that doesn't require one, make a 20% down payment, or close the account once you pay off 20% of your home value.
If you don’t want to worry about saving up enough money for annual taxes or insurance, an escrow account will let you make smaller monthly payments rather than handing over annual lump sums.
With an escrow account, you pay your lender a little more each month to automatically make property tax, home insurance, and fee payments for you. And if your lender makes a late payment, they'll pay that fee as well.
Some homeowners prefer to keep more cash on hand throughout the year and then budget for annual payments themselves. So if you want more control over your money and have at least 20% equity, you can nix the escrow account.
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FAQs about mortgage escrow accounts
An escrow account can be a good idea for people who want to make it easier to budget for the large annual costs of homeowners insurance and property taxes. Many lenders require an escrow account, though, so you may not have a choice until you have at least 20% in home equity.
Yes — just make sure you notify your lender that you changed your homeowner’s insurance policy so that it can adjust your escrow payments.
Some banks require you to send a copy of your tax bill, but plenty don’t. Ask your specific mortgage servicer if it needs a copy of your tax bill.
No, banks don’t pay interest on escrow accounts in most cases. While some states require banks to pay interest, the majority of states don’t.