Understanding Mortgage Escrow Accounts

If you’re new to home buying, you may have heard about money being deposited into and withdrawn from escrow accounts. What is an escrow account in a mortgage? If you don’t understand escrow accounts for home loans, you’re not alone. 

At Altitude Home Loans, our mortgage lenders in Tucson, AZ, have an in-depth understanding of mortgage escrow accounts, which we explain in the post below. 

What Is a Mortgage Escrow Account?

In simple terms, an escrow account refers to a special bank account that holds funds for real estate transactions, including home purchases. Banks don’t pay interest to escrow accounts, but some states have regulations mandating that banks pay interest on money saved in escrow. 

The money isn’t under the direct control of the homeowner. Instead, a neutral third party controls the account and delivers funds according to the terms outlined in the legally binding escrow agreement.

As long as a property is in escrow, the buyer cannot occupy it. To take possession of the property, the real estate deal must go through the various stages of the escrow process.

How Escrow Accounts Work

The easiest way to think of an escrow account is to imagine setting aside a specific amount of money for a particular purpose. When it comes to homeownership, the money in the mortgage escrow account will cover property taxes and homeowners’ insurance. 

Property taxes and insurance premiums can change over time. Home loan lenders review the rates annually during an escrow analysis to ensure the account has enough money to cover those expenses for the year. Sometimes, lenders require borrowers to have extra funds in their escrow account to accommodate additional costs. 

How Escrow Accounts Help With Property Taxes and Insurance

Now that you know the answer to “What is an escrow account in a mortgage?” you may wonder how it pays for insurance and property taxes. You must pay a certain amount of these fees each month. The escrow accounts make that process easier. 

The lender will assess the account’s contents and estimate the monthly insurance and property tax payments. The rate typically equals one-twelfth of the annual total. 

You must put enough money into the account to handle the monthly expenses. The bills go directly to the servicer, who pays the escrow items when they’re due.

Pros and Cons of Mortgage Escrow Accounts

Mortgage escrow accounts help simplify monthly budgets. The accounts spread payments throughout the year to alleviate the burden of large lump-sum payments. These accounts also ensure on-time payments. 

Less control over your money may be a downside to escrow accounts. Also consider the potential for overpayment due to the lender overestimating costs.

Need More Help Understanding Escrow Accounts for Home Loans? Contact Altitude Home Loans

Knowing the answer to “What is an escrow account in a mortgage?” will help you make informed decisions regarding your home loan options. At Altitude Home Loans in Tucson, Arizona, we can help you understand the steps in the mortgage process and provide guidance on managing monthly payments through a mortgage escrow. 

To request more information or to schedule a consultation, contact Altitude Home Loans at (520) 500-1010.