Escrow

In purest terms, escrow simply means funds held by a third party for distribution when certain conditions are met. Sometimes, escrow accounts are used in situations like an auction sale, to ensure the seller is paid when the buyer is satisfied with the condition of whatever it is they bought.

​In real estate, escrow most often refers to money paid by the borrower set aside by the lender to pay for certain fees, like real estate taxes and insurance premiums.

Escrow can be a positive aspect of your mortgage. It puts the responsibility of insurance and taxes on the lender, as long as you are paying what you are supposed to. If taxes or insurance premiums increase, the lender is responsible for covering any shortfalls from the escrow account until your monthly payment can be adjusted to match the new amount.

However, not every borrower uses escrow. Lenders may instead allow you to pay your own premiums and taxes, but may increase your interest, since the lender is taking on additional risk. If you get your mortgage through the Federal Housing Administration, you will be required to have an escrow account.

For most people, having escrow accounts is a positive aspect of the mortgage, especially when it comes to paying taxes. With escrow, the lender is responsible for making sure all local and state taxes are handled properly, and are also responsible for any fees incurred for missing the payment.

If you are unsure whether or not escrow is right for you, an experienced real estate agent can provide advice on the matter.