Definition
An escrow payment is a portion of a borrower’s monthly mortgage payment that is placed into an escrow account (also known as an impound or trust account) managed by the lender or loan servicer. This account collects and holds funds to pay property taxes and insurance premiums on behalf of the borrower when they are due, ensuring that these important expenses are paid on time.
Examples
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Monthly Mortgage Breakdown: John has a $2,000 monthly mortgage payment, which includes $1,200 for principal and interest, and an additional $800 classified as escrow payment. The escrow funds are used to pay John’s annual property taxes and homeowners insurance premiums when they become due.
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Annual Property Expenses: Sarah owns a home with annual property taxes of $3,600 and an insurance premium of $1,200. Her lender divides these annual expenses into 12 monthly payments of $300 for taxes and $100 for insurance, which are collected as part of her monthly escrow payment.
FAQ
Q: What is the purpose of an escrow account? A: The primary purpose of an escrow account is to ensure that property taxes and insurance premiums are paid on time without burdening the borrower with large lump-sum payments.
Q: Can a homeowner choose not to have an escrow account? A: Some lenders may offer the option to waive the escrow account if the borrower meets certain criteria, such as having a substantial down payment or a good credit history. However, this may also depend on the type of loan and lender’s policies.
Q: What happens if there is an escrow shortage? A: If there is a shortage in the escrow account, the lender will notify the borrower, and they will either need to make a lump-sum payment to cover the shortfall or adjust the monthly escrow payment to spread the shortage over the coming year.
Q: Can the escrow payment amount change over time? A: Yes, the escrow payment can change based on adjustments in property taxes and insurance premiums. Lenders typically conduct an annual escrow analysis to determine if there are sufficient funds in the account and adjust the payment accordingly.
Q: Is interest earned on the escrow account balance? A: Whether interest is earned on the escrow balance depends on state law and lender policy. Some states require lenders to pay interest accruing on escrow funds, while others do not.
Related Terms
- Principal: The original sum of money borrowed in a mortgage loan or invested, excluding interest and fees.
- Interest: The cost of borrowing money expressed as a percentage of the borrowed amount, which lenders charge as the payment from a borrower.
- Mortgage Servicer: The company that collects mortgage payments, manages the escrow account, and handles the day-to-day administration of mortgage loans.
- Impound Account: Another term for an escrow account used to collect and hold funds for property taxes and insurance.
- Trust Account: An account set up to hold funds, primarily for property taxes and insurance, until they are needed.
- Property Taxes: Fees imposed by local governments on property owners, based on the value of the property.
- Homeowners Insurance: A type of insurance policy that covers damages and losses to an individual’s residence and assets within the home.
Online Resources
- Consumer Financial Protection Bureau (CFPB) - Provides information on mortgage loans, escrow accounts, and borrower rights.
- U.S. Department of Housing and Urban Development (HUD) - Offers resources about home buying, mortgages, and escrow accounts.
- Rocket Mortgage Resource Center - Information about escrow accounts and related payments.
References
- Consumer Financial Protection Bureau. “What Is an Escrow or Impound Account?” https://www.consumerfinance.gov/ask-cfpb/what-is-an-escrow-or-impound-account-en-106/
- U.S. Department of Housing and Urban Development. “Escrow Accounts.” https://www.hud.gov/topics/escrow_accounts
- Rocket Mortgage. “What Is Escrow?” https://www.rocketmortgage.com/learn/escrow
Suggested Books for Further Studies
- “The Complete Guide to Escrowing Procedures Real Estate Transactions” by Kathleen Cross - Explores the intricacies of escrow procedures in real estate.
- “Real Estate Principles” by Charles J. Jacobus - Provides a detailed understanding of real estate concepts, including escrow accounts.
- “Mortgage Math” by Cathy Robinson - Examines the calculations and financial principles behind mortgage payments, including escrow components.
