On This Page
OverviewWhat are escrow accounts?How do they work?Is an escrow required?Benefits of an escrow account
As a first-time home buyer, there can be so many new concepts, options, and terms flying around, it can sometimes feel a bit overwhelming. And when you’re making a life-changing purchase like a house, the last thing you want to feel is confused and unsure. Here at CapCenter, we want to break down and help you understand every aspect of purchasing your home, so you can be confident that you’re making the right move. Today’s topic: Escrow Accounts.

What are escrow accounts?

Escrow Accounts are savings accounts for your home that a lender uses to hold the portion of your monthly mortgage payment covers your property taxes and homeowners’ insurance. This way, your lender can make sure that your taxes and insurance are paid on time, and you don't have to worry about forgetting to pay them yourself.  

How do they work?

Each month when you make a monthly mortgage payment, most of the money goes to the principal and interest, but a portion of your payment goes into the escrow account. That portion is equal to a 1/12th of the cost of your homeowner’s insurance and property taxes, so at the end of the year, the funds in your escrow account will be enough to cover those costs.  

The amount of money that you have to pay into your escrow account each month will vary depending on the size of your mortgage, your property taxes, and your homeowner’s insurance premiums. Your lender will calculate the amount that you need to pay each month and add it to your monthly mortgage payment.

Once a year, the lender servicing your loan will review your escrow account and make sure that there is enough money in the account to cover your upcoming property taxes and homeowners insurance premiums. If there is not enough money in the account, your lender will send you a bill for the difference. If there is too much money in the account, your lender will refund the excess money to you.

Is an escrow account required?

The short answer here, is, typically yes, but it depends.  If you are getting a home loan guaranteed by the Federal Housing Association (FHA) or Veterans Affairs (VA) Loans, an escrow account is required.  However, if you are getting a conventional loan and meet certain requirements, you may be eligible to waive the escrow, though there is typically a fee charged for doing so, and is contingent on you making your payments on time.

If you were to choose to waive your escrow, your monthly payment may be lower, but you'd have to make sure you saved enough money throughout the year, to cover the cost of homeowner’s insurance and property taxes and pay them yourself when they are due.   It' s also important to note that Escrow Accounts do not cover fees required by a Homeowner’s Association (HOA) or your utilities. These are additional payments that may be required as well if you live in a community with an HOA.

Benefits of an escrow account

Escrow accounts are a good way to ensure that your property taxes and homeowners’ insurance are paid on time. If you don't have an escrow account, you are responsible for making sure that you pay your taxes and insurance on time. If you don't pay your taxes or insurance on time, you may be subject to penalties and interest charges.  Here are some of the benefits of having an escrow account:

  • You don't have to worry about forgetting to pay your property taxes or homeowners insurance.
  • Your lender will make sure that your taxes and insurance are paid on time.
  • Avoid having to pay a fee to waive the escrow account.
  • You may be able to avoid late fees and penalties if you have an escrow account.

We hope this article has helped you better understand what an Escrow Account is and how it works. At CapCenter, we are committed to helping you navigate the complex world of home buying. If you have any questions or concerns about your specific situation, please don't hesitate to reach out to us. Our experienced team is here to help you every step of the way.