Wednesday, 26th of May 2010 at 05:50:55 AMAn escrow account is a designated savings account into which funds get deposited for a specific purpose.
With respect to real estate and home loans, escrow accounts are used to pay real estate tax bills and homeowners insurance payments.
Escrow accounts are managed and disbursed by lenders.
When a homeowner “escrows” his mortgage, along with his scheduled monthly mortgage payment, he must also send an additional payment to the lender equal to 1/12 of the home’s annual real estate tax bill plus 1/12 of the annual homeowners insurance bill.
Due to the nature of insurance and taxes, both will go up over time and you will see notices from time to time that your payment will go up to cover these adjustments. There is generally 2 months worth of reserves in the escrow to cover any increases as they occur. By sending a pro rata portion of the tax and insurance bill each month, the homeowner’s escrow account will always, in theory, have enough funds to make payments in full as tax bills and insurance premiums come due.
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