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Understanding Escrow: Secrets to Making the Most of It

CBRMR_Understanding EscrowEscrow. Another one of those pesky real estate terms that you hear all the time (especially if you are a big HGTV fan), but are never quite sure how to define. The team at Coldwell Banker Rizzo Mattson, Realtors believes that understanding escrow is easy and wants our homebuyers to be “in the know,” so let us explain:

What is Escrow?

When you close on your dream home, you will put some real estate taxes and insurance premiums into an escrow account (sometimes it’s called an impound account, so don’t panic if that is what you hear it described as). Your lender will use this money to cover these expenses as they arise.

Some things escrow might cover:

  • Private Mortgage Insurance
  • Insurance (for things like hazard, fires, and floods)
  • City property taxes
  • County property taxes

In 1974, Congress passed the Real Estate Settlement Procedures Act that states the amount of funds held in escrow may not be larger than two months worth of payments. Examinations of and adjustments to these funds are usually made once a year, as sometimes tax and insurance rates can fluctuate (don’t worry about under or over paying, if there is ever a discrepancy, your lender will contact you).

How does Escrow Benefit Me?

Escrow benefits your lender as it protects them from tax liens and uninsured losses, but this transfer of responsibility also benefits you, as you don’t need to worry about another payment to make, it’s all done automatically from your escrow account.

Escrow also benefits you as the large annual expenses of taxes and insurances are set aside ahead of time and then broken into smaller, monthly payments.



Do I have to open an Escrow Account?

No. There is no legal mandate stating that all mortgages must come with an escrow account, but many lenders require escrow accounts for government-backed loans like VA or FHA loans. Sometimes lenders will allow you to pay your own property taxes and home insurance premiums; however, this usually means your mortgage will have a higher interest rate because the lender is assuming a bigger risk.   

If you have an escrow account in place and would like to cancel it, it may be possible, but it’s difficult. You will need to speak directly to your lender to see what options you can explore.


Interested in buying the home of your dreams? Contact us today!

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