Mortgage Escrow Account Definition
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What does escrow mean?

If you are shopping for a home, you’ve probably heard the term “escrow” before. Knowing the definition of an escrow account and how it works can benefit you during the home buying process and for the entire length of your home loan. Simply put, escrow is a special type of account in which something of value is held by a third party until certain agreed upon conditions are fulfilled. More specifically, a mortgage loan escrow account may be necessary when purchasing a home. Read on to get all of your questions about mortgage escrow accounts answered.

What is mortgage escrow?

Mortgage escrow accounts are used to pay property taxes and homeowners insurance payments on a home. If your property is in a flood zone, federal regulation requires you to have an escrow account that is used to pay the flood insurance premiums. Essentially, homeowners pay part of their monthly payment into an escrow account, which includes property taxes, homeowner’s insurance premiums, and flood and mortgage insurance premiums, if applicable. Having all of these payments combined in an escrow account allows the lender to pay these premiums on your behalf when they are due so you don’t have to keep track of and pay these large bills yourself.

The monthly escrow portion will be added to the principal and interest payment, so it’s important to understand, for your budget, that your total payment will be higher by this amount. This mortgage payment calculator can help you calculate your monthly payment.

The Real Estate Settlement Procedure Act (RESPA) protects consumers by placing legal limitations on the conditions that lenders can require. Under this law, you should pay no more per month than 1/12 of the total sum of all annual payments plus up to an additional two month’s worth for cushion. This cushion helps with annual increases in tax amounts and insurance premiums.   Lenders must also perform an annual escrow account analysis in order to alert you of shortages or surpluses within the escrow account.

Is escrow required?

It depends on the type of loan. Federal Housing Administration (FHA) loans require that you pay into the escrow account for the duration of the loan. Some providers don’t require them at all.

Whether or not your loan provider requires an escrow may also depend on your financial situation and the cost of the loan. Typically, if the buyer has paid a down payment of 20% or more, most lenders won’t require an escrow, but there is usually an escrow waiver fee due at closing if you choose not to have escrow on your loan.

Mortgage escrow accounts are important to consider when buying a home. Find out about Nationwide’s mortgage loan options today.

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