A mortgage escrow is a special account set up by your lender to collect and hold funds from your monthly mortgage payments that are used to pay property taxes and homeowners insurance on your behalf. This arrangement ensures these important bills are paid on time, protecting both you and the lender from risks like tax liens or uninsured property damage

. Here is how it works:

• Your lender estimates your annual property tax and insurance costs.
• This total is divided by 12 to determine a monthly escrow payment.
• Each month, this escrow amount is added to your principal and interest mortgage payment.
• The lender deposits these escrow payments into the escrow account.
• When your property taxes and insurance premiums are due, the lender pays them directly from the escrow account

The main purpose of an escrow account is to protect the lender’s interest in the home by ensuring taxes and insurance are paid, but it also benefits the borrower by spreading out large annual or semi-annual expenses into manageable monthly payments and helping avoid late fees

. Some key points about mortgage escrow accounts:

• Most lenders require escrow accounts if you have less than 20% equity or if your loan is FHA or VA-backed, though some borrowers with higher equity may negotiate to pay taxes and insurance themselves

• Lenders often require an escrow cushion (usually up to two months’ worth of payments) to cover unexpected increases in taxes or insurance

• Each year, lenders perform an escrow analysis to adjust your monthly payment if your tax or insurance costs change. If there is an overage, you may get a refund or credit; if there is a shortage, your payment may increase

In summary, a mortgage escrow account is a financial tool used by lenders to manage and pay your property taxes and insurance from your monthly mortgage payments, providing convenience and protection for both parties throughout the life of the loan