An escrow account for a mortgage is a separate account set up by the lender to hold funds collected as part of your monthly mortgage payment. These funds are used to pay certain expenses related to homeownership, such as property taxes, homeowners insurance, and sometimes mortgage insurance.
When you make your monthly mortgage payment, a portion of it goes into the escrow account instead of being applied directly to the principal and interest of the loan. Then, when bills for property taxes or insurance come due, the lender uses the money in the escrow account to pay them on your behalf.
Escrow accounts help ensure that these expenses are paid on time, reducing the risk of default for the lender and ensuring that the property remains adequately insured and that taxes are paid promptly. It also helps homeowners by spreading out the costs of these expenses over the course of the year, rather than requiring large lump sum payments.
In addition to holding funds for property taxes, homeowners insurance, and sometimes mortgage insurance, an escrow account for a mortgage may also include reserves. Reserves are additional funds that the lender may require to ensure there is enough money in the escrow account to cover unexpected increases in taxes or insurance premiums. These reserves act as a buffer to prevent shortages in the escrow account, which could lead to the lender having to advance funds or increase monthly payments.
When refinancing a mortgage, the escrow account is typically reestablished. This means that the lender will calculate the new escrow requirements based on the updated loan terms, including any changes to property taxes or insurance premiums. The remaining balance in the old escrow account may be used to start the new one, or it may be refunded to the borrower if there is an overage after all outstanding bills have been paid.
Reestablishing the escrow account during refinancing ensures that the lender can continue to manage the payment of property taxes and insurance on behalf of the borrower. It also helps maintain consistency in the budgeting process for homeowners by spreading out these expenses over the course of the year.
Everyone’s real estate situation is unique, if you’d like a free comprehensive review of your mortgage questions, please feel free to reach out via text, email or phone call. 720-250-7764 or nick.ross@edgehomefinance.com.
