When you purchase a home, managing the different financial aspects may feel complex. One important part of the process is the mortgage escrow account. Let’s look at what a mortgage escrow account is, how it works and how it may benefit you as a homeowner.

What is a Mortgage Escrow Account?

Escrow is a special account set up by your mortgage lender to pay property taxes, homeowners insurance and, if applicable, flood insurance and private mortgage insurance (PMI) for you. Instead of paying these expenses directly and having to keep up with when each payment is due, you make monthly payments into the escrow account as part of your total mortgage payment. The lender then uses these funds to cover the costs when they are due.

How Does Escrow Work?

When you close your loan, your lender will estimate the annual property taxes and insurance costs. These costs are divided by 12, and the resulting amount is added to your monthly mortgage payment as a portion of the total payment in addition to principal and interest.

Benefits of Escrow

1. Simplified Payments

   Instead of managing multiple payments for taxes and insurance, those individual payments are handled by your lender out of the funds you’ve paid into escrow. You benefit from a single monthly payment amount.

2. Avoiding Large Lump Sums

   By spreading the cost of insurance and taxes over 12 months, you can avoid being challenged with large lump sum payments, allowing for easier budgeting.

3. Ensuring Timely Payments

   With insurance and tax payments handled through escrow, you don’t have to worry about missing a payment deadline, reducing the risk of late fees or lapses.

A mortgage escrow account can simplify homeowners' tax and insurance management. Federal regulations set guidelines for how escrow accounts are managed, ensuring clear disclosures and accuracy. Understanding how escrow works can help you better understand your mortgage, aiding in your financial planning.

Sources:
https://consumer.ftc.gov/articles/your-rights-when-paying-your-mortgage
https://www.consumerfinance.gov/ask-cfpb/what-is-an-escrow-or-impound-account-en-140
https://www.cnbc.com/select/what-is-escrow

This article is provided as a free service to you and is for general informational purposes only. Cadence Bank makes no representations or warranties as to the accuracy, completeness or timeliness of the content in the article. The article is not intended to provide legal, accounting or tax advice and should not be relied upon for such purposes.