Escrow Thursday: What Is an Escrow Account?

What Is an Escrow Account?

An escrow account starts out as a third-party account to a real estate transaction where the buyer and seller place and receive the funds in a real estate transaction. The escrow company also assures that all terms of the purchase and sales agreement are met and then disburses the funds to the appropriate accounts, such as the utility companies and tax assessor office, for any partial payments due. It then turns into an account, if you so desire, where tax and insurance payments are collected from your monthly payments and then are paid out when due.

The advantages of an escrow account after closing is that it helps you to manage your budget. You do not have to make a lump sum payment to pay your homeowners insurance or property tax bill. You do not have to track when these payments are due. You do not have to make a special effort to save the money necessary for these payments. In other words, it can give you a lot less worry and stress when these bills come due and payable.

When you make your monthly payment to your mortgage company, the part of the payment which is for insurance and taxes is placed by them into your escrow account. The funds can only be used to pay taxes and insurance on your behalf. Your mortgage company then pays the taxes and insurance bills for you when they are due. Your mortgage company also monitors any changes to your tax and insurance bills and adjusts your mortgage payments to reflect those changes either up or down. So if the cost of your insurance or the amount you are charged for property taxes changes, so does your mortgage payment.

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