Escrow Thursday: Do Lenders Pay Interest on Escrow Accounts

Do Lenders Pay Interest on Escrow Accounts?

There are few, if any, lending institutions that pay interest on monies held in an escrow account. Many borrowers feel that they should be paid interest on the money held in escrow fro taxes and insurance. If they did not have an escrow account, they would be able to place the money for taxes and insurance in an interest bearing account and  collect interest until a payment was due.

There is one type of escrow collection in which the portion of the monthly payment required to pay taxes and insurance is deducted each month from the balance owed on the mortgage. When a payment is made for taxes or insurance, the amount of the payment is added back to the principal balance. While this reduces the amount of the loan interest that a customer pays, it amounts to earning interest on the escrow balance at the same rate of interest as the mortgage loan. This method is known as escrow capitalization.

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