Escrow Account

Definition - What does Escrow Account mean?

Escrow accounts are accounts established to hold funds which are used to pay property taxes and insurance premiums for home buyers. They may be required by the mortgage lender who is concerned about protecting their interests. For instance, it can be used to lessen the negative impact of a tax lien on the property or repair property damage that would otherwise eliminate the house as collateral for the loan.

Justipedia explains Escrow Account

To reduce the chance that the lender will not have the house as collateral or that they may have the house, but not a clean title, the lender may require the home buyer to pay property taxes and housing insurance through an escrow account.

Each month, the homeowner deposits payments into the escrow account, generally as part of the mortgage payment, and the escrow firm makes the required payments from the escrow account.

Home buyers can track their escrow accounts by reviewing the annual escrow statements sent to them each year. Under federal law, lenders are requirement to send annual statements which detail the amount of escrow money collected and paid throughout the year.

Property taxes and homeowner’s insurance premiums may increase or decrease over time, allowing for an overage or shortage in a homeowner’s escrow account. In some cases, if the escrow balance is higher than the amount needed to pay property taxes and homeowner insurance, the homeowner receives a refund at the end of the year.

More often, however, the homeowner’s taxes will increase, and the homeowner will have an escrow shortage. If a shortage occurs, the homeowner may be required to increase their escrow payments in the following year or send the lender a one-time escrow payment.

It is the homeowner’s responsibility to ensure that tax bills and insurance payments are made each year, although the lender may be responsible for sending the payments to the appropriate parties. Homeowners who receive a tax or insurance bill should verify with their lender that the payment was made.

Homeowners may have the option to cancel their escrow accounts. If the account was required by the lender, there will be certain requirements for cancellation to occur. For instance, the homeowner may need to have a certain amount of equity in the home or have the loan for a certain number of months.

Escrow accounts can also be used in other business transactions where there may be a delay in the exchange of goods, services, or money. In this case, the escrow agent acts as the intermediary between the buyer and seller and holds certain funds and documents such as money, a deed of trust, and the promissory note for the property until certain contractual obligations are fulfilled. After which time funds or documents are released to the necessary parties.

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