The Escrow Fund: What It's All About


Americans love to pay others to do their work. They get their houses cleaned, cars washed, and meals cooked without lifting a finger. How would you like this treatment from your mortgage lender? You can get your wish. An escrow fund is a trust account established by your lender when you take out a mortgage. Lenders extract a portion of your monthly payment for you, and set it aside in an escrow account to pay your tax and insurance bill when they’re due.With an escrow fund, you never have to worry about paying your taxes and insurance directly. Though it may seem like your lender is doing you a favor by paying your bills for you, in essence, you arehelping them. Mortgage companies want to make sure that your taxes and insurance are paid to protect themselves from uninsured losses or government foreclosures as a result of unpaid taxes.

SEE ALSO: What To Expect When You’re In Escrow

Pros Of An Escrow Account

If you’re not the “saving” type, an escrow account could keep you from scrambling when tax and insurance payments are due. Additionally, without an escrow fund, you risk facing the temptation to use the money for pleasure instead of saving it to meet your obligations. Lenders are also responsible for automatically adjusting monthly payments to make up for any changes in real estate taxes or insurance costs. Your lender will give you an annual escrow statement that details every withdrawal and the payments made. If you sell your home or refinance your mortgage, you’ll receive a refund if you have an available balance.

Cons Of An Escrow Account

Below are some disadvantages of an escrow account:
  • You could use the money in the escrow fund as an investment to gain interest instead of letting it sit in an idle account. Though some lenders pay interest on escrow funds, most do not. This varies by state.
  • Though most lenders pay bills on time, there’s always a chance of a late payment. Your lender is responsible for any late fees, as long as you pay your mortgage on time. Should your insurance company cancel your policy because of your lender’s late payment, you can sue.
  • Your lender may charge you a fee to cancel your escrow account. In some cases, you can request a waiver if you have a solid payment record.
Is setting up an escrow account the right decision for you? You may not have a choice in the matter. If you put down less than 20 percent, or your loan-to-value ratio is not high enough, your lender may require an escrow account, or tack you with a higher interest rate if you refuse. Your final decision will depend on your personal finance habits and your comfort level. Make an educated decision that makes sense for your future.

SEE ALSO: Must Know Dangers of Adjustable Rate Mortgages

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