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What is a Mortgage Escrow Account?

So you have heard the term before. Escrow...what does it mean? Is it something that you need to pay attention to while getting a mortgage? Maybe it will help you, but it may not be something you need to do. Either way, you need to figure it out. That is why we have decided to help you by putting this short piece together to help you more understand what escrow is and how it will affect you.

How Does Escrow Affect Me?

Mortgage escrow accounts are set up to make sure that a homeowner's mortgage and insurance premiums are able to be paid in a timely manner. Escrow accounts are set up in order to protect the lender and the borrower, not just one or the other. This is set up to provide coverage for any misunderstandings that there may be between the two parties. An escrow is essentially a guarantee that no matter what there will always be enough money so that the bills can be paid on time. This helps protect against delinquencies.

One of the biggest advantages to an escrow account is that it helps with a budget. The borrower's tax responsibilities, as well as insurance responsibilities are budgeted over the course of the year. That way you will not have to come up with large lump sums many times during the year. With insurance, for example, this is good. Because you always know there will be an updated payment just in case something happens. The protection factor is what makes escrow account very good to have.

Escrow can even lead to mortgages with better rates and down payments. This is because it protects both sides in the process. That is good because it gives the lenders one less thing to worry about. So then they feel more comfortable about giving you a solid rate. This is something that can really help you. Because everyone should want a better rate on their mortgage.

The Process of Payment

So now you may be wondering how the lender will come up with your payment. Good question. There are very strict laws on how much the lender is able to collect. If there is a possibility of an escrow account not having enough funding within it, then there are laws set so that the lender can require extra payments. This can be more monthly deposits until the funding is back up to normal standard. A lender is able to require a monthly payment of 1/12 the total amount of premiums and other charges. Plus they will not be able to collect more than 1/6 of the estimated annual payment.

Overall, an escrow account may be something you want to do. But just make sure you get a firm grasp on the situation, and really judge if it is right for you. This is something that can be very beneficial, but if used wrong, then you can wind up in a bad place.

National Rate Averages

Mortgage Rates

Product Rate
5/1 yr ARM 3.147%
1 yr ARM 3.299%
15 yr fixed 3.221%
30 yr fixed 3.815%

Home Equity Rates

* Updated Jun 7, 2012