Understanding Escrow

Escrow is one of the more complicated concepts involved in the mortgage loan process. Many consumers do not know what the term “escrow” means or have only a vague understanding of it. However, it is important to be aware of this term if you are buying a new home and are in the market for a mortgage loan.

As it relates to the mortgage loan process, escrow is a way for lenders to be sure that the insurance and taxes on your mortgaged home will be paid regardless of whether or not you are timely with your mortgage loan payments.

The lender has a serious stake in maintaining the value of the home, because should you default on your mortgage loan, they will re-possess and sell it. While no consumer wants to think about losing their house, the lender needs to address the issue of whether you are fully able and willing to meet the terms of your mortgage loan.

If the taxes on a house are not paid in time, the government could place a lien on it. If the insurance policy is allowed to lapse due to non-payment of premiums, the house will not be covered if it is damaged in a natural disaster such as a hailstorm. Therefore, the lender must be certain that neither taxes or insurance costs go unpaid.

The lender usually does not rely on the mortgage loan holder to pay these important items on their own. Rather, an escrow account is set up and each month the costs are made part of the mortgage loan payment. The amount maintained in the account usually includes a cushion in case you are behind on payments. Your lender will provide specific details.