When purchasing a house, you may choose, or be required, to have an escrow account established by your lender to pay the required real estate taxes, homeowners insurance, and if applicable, mortgage insurance on your behalf. Setting up this escrow account beforehand ensures that those bills are paid in full and on time, without having to save large amounts of money and worry about keeping track of due dates. By taking out a portion of these funds every month with each mortgage payment, the lender collects for deposit into the escrow account to pay these annual fees.
The monthly escrow account will change throughout the life of the loan. This is because real estate taxes and homeowners insurance premiums may increase or decrease annually.Each year, the account is reviewed to make sure the escrow portion of the monthly mortgage payment accurately reflects the projected real estate taxes and homeowners insurance premiums.
A monthly escrow amount is determined by calculating the amount that is to be paid over the course of 12 months for your real estate taxes, homeowners insurance and, if applicable, mortgage insurance premiums. This estimated amount is then divided by 12 and added to the customer's monthly mortgage payment.