An escrow account holds your prepayment of property taxes and insurance premiums until the date they are due. Most banks require homebuyers to set up an escrow account when they purchase a home -- especially if they have a small down payment. If you weren’t required to set up an escrow account, saving throughout the year can cut down on the shock of having to pay a large lump sum. Although most banks offer escrow accounts, they typically charge extra fees to use the service. Save yourself some money, and design your own escrow account.
Contact your homeowners insurance company and tax authority. Ask for a copy of your insurance bill and tax bill. Verify the total amount due for the year and the payment dates. Typically, tax collectors require quarterly, semiannual or annual tax payments, depending on your city or county regulations. Your insurance company might allow monthly payments or require payments a year in advance.
Add your annual insurance premiums and property taxes together to get the total amount. Divide this number by 12. This is the minimum amount you should put into the escrow account each month. If you’d rather make weekly payments, divide the total number by 52.
Contact your mortgage lender and other private banks and ask about escrow accounts. You might even consider opening a separate checking or savings account that earns interest. The account doesn’t have to be specifically for escrow. Any type of account will do.
Open the account through the bank that offers the best incentives. You might have to make an initial deposit to open the account.
Set up automatic withdrawals through the insurance company and the tax authority if you decide to go with a basic bank account instead of an escrow account. You’ll have to provide the bank’s routing number and your bank account number. This ensures that your payments arrive on time. If you go with an escrow account, the bank will make the payments for you, but it will probably charge a fee.
Recheck the amount due for each bill a few times a year. Insurance premiums and property taxes can change, depending on property values, condition of your home and tax rates. Adjust your escrow or bank account to reflect any changes in the bills.
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- What Happens If Both You and Your Escrow Account Pay Your Taxes?
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- How to Calculate Payments on a Mortgage