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Source: https://www.housingwire.com/articles/many-homeowners-dont-understand-their-escrow-account/
According to a recent survey, only 52% of homeowners fully understand how their escrow account works. The survey also found that 80% of respondents said they know what an escrow account is and that its purpose is to pay property taxes, homeowners insurance, and sometimes mortgage and/or flood insurance, but they do not “completely understand how their escrow account works.”
An escrow account is a savings account that holds funds for property taxes and insurance premiums. The funds are held by a third party until they are needed. When a consumer closes on a mortgage, the lender will set up an escrow account. The lender will estimate the annual property tax and insurance costs. The lender will divide the estimate by 12 and add it to the borrower’s monthly mortgage payment. The lender will deposit the escrow portion of the payment into the escrow account each month. When the property taxes and insurance bills are due, the lender will pay them using the money in the borrower’s escrow account. The lender reviews the escrow account annually to make sure it has enough funds to pay the next estimated bills and will adjust the monthly reserve and payments as needed.
However, importantly, the homeowner is still legally responsible for making sure the real estate tax bills and insurance bills are paid. Therefore, it is very important that homeowners not only understand what an escrow account is and how it is supposed to work, but they should also be monitoring their account and billing statements to make sure the bills are paid by the mortgage company on time.
Property taxes and homeowners insurance premiums continue to rise and, in turn, escrow account balance continue to rise. Home prices across the U.S. surged more than 29% since 2020 and property taxes continue to rise along with the increased appreciation. Homeowners insurance premiums alone jumped 21% during the year ending in May 2023. However, 36% of homeowners believed that their monthly mortgage payments would not increase along with their rising tax and insurance bills.
It is more important than ever that consumers have a trusted real estate professional in their corner to help explain all the intricacies of every part of the home buying process – including providing clarity about how escrow accounts work.
This article is not intended to provide legal advice. This email does not create an Attorney-Client relationship, and nothing set forth herein is to be construed as legal advice or as a substitute for the advice of a duly licensed attorney. Seek legal counsel from an attorney admitted to practice in your jurisdiction if you need legal advice or representation.
