Understanding Escrow

The home financing and closing process can be daunting even for the most seasoned of homebuyers. Today we'll help demystify at least one of the steps - paying into an escrow account.

When closing on a home, a portion of your funds will be deposited into an escrow account. An escrow account is set up by your lender to hold funds that will later be used to pay for property taxes and homeowners insurance. Most lenders require two months of funds to start up the escrow account.

The good news? You won't have to pay your property taxes or homeowners insurance payments directly. These bills will go straight to your lender who will pay with the funds in your escrow account. This prevents you from receiving a large tax bill each year and is instead paid by funds you pay with your mortgage payment each month.

Not all loans require an escrow account. Talk with your lender for specifics. FHA and VA loans do require escrow accounts along with most loans with less than a 20% down payment.

It is possible to opt-out of an escrow account after paying on your mortgage for a determined amount of time. Talk with your lender if you would rather be responsible for the tax and insurance payments yourself.