What Is an Escrow Account?
An escrow account is a holding account managed by a third party to cover property taxes, homeowners insurance, and other costs.
How Does an Escrow Account Work?
- 🏦 Lender collects escrow payments as part of your monthly mortgage.
- 📑 Funds are used to pay property taxes and insurance when due.
- 🔄 Escrow adjusts annually to reflect tax and insurance changes.
What Does an Escrow Account Cover?
| Expense | Paid Through Escrow? |
|---|---|
| Property Taxes | ✔ Yes |
| Homeowners Insurance | ✔ Yes |
| Private Mortgage Insurance (PMI) | ✔ Yes (if required) |
| Utilities & HOA Fees | ❌ No |
Pros & Cons of an Escrow Account
| Pros | Cons |
|---|---|
| ✔ Simplifies budgeting | ❌ Higher monthly mortgage payment |
| ✔ Ensures property taxes & insurance are paid | ❌ Annual escrow shortages may require additional payments |
| ✔ Prevents missed payments & penalties | ❌ You don’t earn interest on escrow funds |
Do You Need an Escrow Account?
Escrow is required for many loans, but homeowners with 20% equity may be able to opt-out.
The Bottom Line
An escrow account helps manage property taxes & insurance, but it adds to your monthly mortgage payment.
“Escrow makes budgeting easier, but it’s important to monitor your account for annual adjustments.”
— Sarah Thompson, Mortgage Advisor
Frequently Asked Questions
Can I remove escrow from my mortgage?
Yes, if you have 20% home equity and your lender allows it.
What happens if my escrow balance is short?
Your lender may require a lump sum payment or adjust your monthly escrow.
Does escrow affect my mortgage payment?
Yes, escrow increases your monthly mortgage payment to cover property taxes and insurance.