Definition Escrow Account

Definition Escrow Account Explained

An escrow is simply a legal arrangement in which an asset such as property, money, an expensive piece of art, a car title, website, or other asset is held in a trust by a third party until a specific requirement is met, such as signing a contract or paying off an item.

Escrow Account

An escrow account is held in the borrower's name to pay obligations such as property taxes, insurance premiums, lease payments, hazard insurance, and other associated property payments and expenses when they are due. It basically insures that these costs are paid in a timely manner.

Escrow accounts are important to lenders because the lender has an investment in your home, just like you do. For example, if you fail to pay your property taxes on time then your home may be forced into foreclosure, even if you pay your mortgage loan promptly each month. Additionally, if you do not pay your homeowners insurance premium and the policy lapses, an unexpected natural disaster can destroy your home and leave the lender without an investment.

Escrow Disbursements

Once the funds in an escrow account are used to pay a bill it becomes what is known as an escrow disbursement. If your taxes or homeowners insurance premiums are paid late by your lender then you are not responsible for any late fees incurred; it is the responsibility of the lender or company that services your mortgage.

Escrow Analysis

Once in a while an escrow analysis is completed to insure that the original escrow account is sufficient to cover typical monthly bills. Adjustments are made accordingly to either make your payments higher or lower.

How Exactly Does My Account Work

Every month you have certain bills due related to home ownership. Each month you as a borrower are required to make a deposit into your escrow account. The bank, your mortgage lender takes the money you deposit and uses it to pay the bills that are due.

Sometimes you may be required to deposit more money each month than what is actually due to cover the bills. This extra amount is called a cushion. If you fail to pay into your escrow account one month, then that cushion will cover that month’s bills.

Large cushion requirements along side already high mortgage payments are somewhat controversial and can leave you with less money in your pocket each month. Respected and reliable lenders will not require huge cushions, and will also pay interest to the borrower for money sitting in an escrow account.

The Amount in Your Escrow Account

Even if you’re still not completely grasping the definition escrow account and what it means to you, here’s a fact you should consider. A lender cannot just state a blind amount of money that you need to put into an escrow account. In 1997, new escrow account regulations were set by the Real Estate Settlement Procedures Act (RESPA). These regulations ensure a couple of things:

1. It limits the amount of money a lender can require you hold in an escrow account for payments (such as insurance and taxes).
2. It requires a lender to submit an initial and annual statement about your escrow account.

If you are worried about the amount your lender is requiring you to hold in an escrow account there are some calculations you can do yourself at The U.S Department of Housing and Urban Development (HUD).

If you think your lender is requiring a larger amount be held in an escrow account than what you figure is reasonable there are ways to dispute the amount. The first step is to make a “qualified written request” to your lender. The lender is obligated to respond based on RESPA regulations within 20 days and resolve the written request in 60 days. If you and your lender cannot reach a satisfactory agreement, then the next step is to file a complaint with HUD.