A mortgage escrow account is similar to a savings account.
It is managed by the mortgage servicer. Mortgage servicers are companies that collect your mortgage payment every month.
Your monthly mortgage payments include principal and interest, as well as reserved real estate taxes and home insurance payments.
This part of the reserved real estate taxes and home insurance payments are deposited into the mortgage escrow account.
When it comes time to pay real estate taxes (twice a year) and home insurance (once a year), the mortgage servicer will make the payment for you.
Each time you establish a mortgage, your mortgage servicer will set up an escrow account for you, whether purchasing a house or refinance. It is generally required to deposit a few months of deposit in advance ( about several thousand dollars).
So in your closing cost, there is an item called escrow. It is not a fee charged by the lender but a deposit to pay the property tax and home insurance.
If you do a refinance, your previous mortgage servicer will send you the remaining balance in your last escrow account by check.
Why is a mortgage servicer so kind to help you pay the property tax and home insurance? Because they charge a fee for the service. A small part of your monthly interest (usually 0.25% ) is paid to the mortgage servicer.
If you ask, "What if I don't need an escrow account? Can I get a lower interest rate of the mortgage if I pay the property tax and home insurance by myself?"
If your down payment is higher than 20%, it is generally allowed to waive an escrow account. However, some mortgage companies charge you an extra fee for canceling the escrow account. And your interest rate will not be lower. Therefore there is no need to waive an escrow account.
Each year, the mortgage servicer estimates the property tax and home insurance payment for the following year. Then servicer collects a monthly advance deposit (included in the monthly mortgage payment) based on the estimate.
Generally, the property tax increases every year, so your mortgage payment will increase accordingly. In addition, the mortgage servicer will refund you if the actual property tax and home insurance payment is lower.
However, if the actual property tax and home insurance payment is higher than the escrow account reserve, the servicer will ask you to cover the shortage.
When you buy a house and make an earnest money deposit, you may also hear of an escrow account. That is a third-party escrow account. The deposit will be kept temporarily in an escrow account before settlement. Then, at settlement, the deposit will be released as a part of your closing cost. The settlement company generally manages this escrow account.
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