What is an escrow account?
Escrow accounts, sometimes referred to as impounds, are special accounts set up in which money is held to pay for things such as property taxes, hazard insurance premiums, mortgage insurance premiums, and flood insurance premiums, if required.

The escrow funds are paid by the borrower with each of their monthly payments and are held by the lender until the escrow items must be paid.

For example, if you're home had annual real estate taxes of $2400, the lender would collect $200 per month so that after 12 months of payments, sufficient funds would be in the escrow account to pay your taxes. If your first tax payment will be due less than 12 months from your closing, the lender may have to collect a larger initial deposit for your escrow account at closing so that the taxes can be paid in full when due.

Many lenders favor escrow accounts because it ensures that your taxes will be paid when due and that there wouldn't be any lapse in coverage for insurance due to non-payment.

Some homeowners prefer to escrow for these items so that they do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year. Other homeowners prefer to control the payment of these items themselves, usually because they prefer to set aside the funds themselves in interest bearing accounts rather than having the lender hold them in what is most commonly a non-interest bearing account.

Many lenders will allow you to decide whether or not you wish to escrow for payment of taxes and insurance. However, if your down payment is less than 10 or 20 percent of the purchase price, the lender may require that you escrow.

If you do choose not to escrow, the lender may charge you an escrow waiver fee. Ask the lender how much the fee is to waive tax escrows so that you can decide what makes the most sense for you.
 
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