What Does an Escrow Payment on a Mortgage Mean?

You can make escrow payments as part of your mortgage payment.

You can make escrow payments as part of your mortgage payment.

Buying your first home is exciting, but during the process you're going to hear a lot of new terms that might confuse you. One of those terms will be mortgage escrow. In its easiest form, the escrow account held by your lender will pay your taxes and insurance.

Opening Escrow

Fortunately, you won't have to worry about setting up an escrow account. Your mortgage lender will do this automatically. Escrow accounts are created when your mortgage account is created. Your monthly mortgage payments include payments for the principal, the interest, taxes and insurance. The taxes and insurance portions are automatically deposited to the escrow account.

Monitoring Escrow

If you like to keep records of your spending, your escrow manager will help with that too. You'll get an official escrow statement 45 days after your loan closes. This will show you how much your lender plans to pay for taxes and insurance on your behalf. It'll show those figures for the entire year. The lender also has to send you an annual statement.

Using Escrow

Technically speaking, you don't use the escrow account at all. The lender is responsible for all of the payments. The advantage to that is you don't have to worry about paying a bill separate from your mortgage for these expenses.

Opting Out

It's possible to opt out of escrow, but it's not easy and could be costly. Lenders want you to keep an escrow account until your loan amount is less than 80 percent of your property value. You'll need an appraisal to prove that, which can cost between $375 and $500. You could also refinance the home, but that may not work out so well. Mortgage companies may also charge an additional fee to stop escrow.


About the Author

Doreen Martel is a writer specializing in finance, nonprofit organizations and real estate. She has worked in the financial industry for more than 20 years. Martel is a graduate of Dean College in Franklin, Mass., holding a certificate in accounting.

Photo Credits

  • Thinkstock/Comstock/Getty Images