Escrow Accounts

What Is an Escrow Account?

An escrow account is an account that is set up by your mortgage company to pay homeowner’s insurance and property taxes on your behalf. Here’s how it works:

When you make your monthly payment on your mortgage, the lender takes a portion of that payment and places it into a separate account (the escrow account) where the money waits and compounds until your real estate taxes or homeowners insurance come due.

The escrow account may include an extra cushion amount as a precaution to ensure that your lender has enough money to make the payments when they come due. The Real Estate Settlement Procedures Act (RESPA) law sets the maximum cushion limit at two months of escrow payments. When you close on your home, your attorney will verify this amount.

Escrow Accounts in a Refinance

When you refinance your mortgage, you cannot carry your old escrow account to the new mortgage. Instead, the funds still available in the previous escrow account will be returned to you within 45 days of refinancing.

During the refinancing process, you’ll decide whether to open a new escrow account with your refinanced mortgage. Escrow accounts are not required on most loans but to waive them often results in a small increase to your interest rate or fees.

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