What is a mortgage escrow account?

Understanding Mortgage Escrow Accounts

By Mark Barnes

Direct Lending Solutions Staff Writer

Mortgage escrow accounts often confuse borrowers and can make closing a mortgage loan very difficult. According to www.dictionary.com, the word escrow means, “m oney, put into the custody of a third party for delivery to a grantee only after the fulfillment of the conditions specified.” Basically, this means that a lender holds your money in an account, called escrow, to pay to someone else, so you don’t have to pay the debt yourself. Apply for a Home Loan.

Escrow accounts can be very convenient to borrowers, but they can be a nuisance at mortgage loan closing time. You see, when loans close, escrow accounts must be created, and this, of course, takes money. For example, a real estate tax escrow must be created, which means paying several months of taxes in advance to create the escrow. This way, as you pay your mortgage, even though these taxes may be included in a mortgage payment, you are creating the escrow, so the lender has a sort of slush fund to make the payments in advance. The same is true of your home owners insurance and mortgage insurance, if there is any.

The problem these escrow accounts provide, during closing time is they often inflate closing costs. Real estate tax escrows, for example, sometimes make refinance loans collapse.

I once had a customer who paid over $700 monthly for taxes. When he refinanced his loan, the lender needed to collect nine months of real estate taxes in advance for the escrow account. He already had other costs over $6,000, because of the size of his mortgage, so this took his total costs to over $12,000 – most of which he had to pay out of his pocket.

In order to get this borrower to complete the loan, he needed to understand that he would get most, perhaps all, of the $6,300 he paid in tax escrows back, when his old lender settled his account a few months later.

When mortgages are satisfied, or paid in full, a lender will return unused escrows to the borrower. So, you’ll get a nice check, usually within 60 days. So, the aforementioned customer was willing to pay a few thousand dollars extra to close his loan, which was saving him over $500 monthly, because he knew he would get the money back soon enough.

So, remember, when closing your new mortgage, don’t let escrow accounts, which may inflate closing costs, scare you away. You’ll always get your money back.