What is an Escrow Account and How Does it Work?

First time homebuyers entering the market will run into many “new” experiences, often times leading to buyers receiving a crash course in home buyer education. One of the biggest educational moments for buyers is escrow accounts and how it fits into the buying process. We know just how confusing buying a home can be, so here is what new buyers need to know about escrow accounts.

What is an Escrow Account?

An escrow account is a way for home buyers to manage property taxes and homeowner’s insurance for their home. If you are in the market for purchasing a home, your lender will be able to help you determine if an escrow is needed and will help get it set up before closing.  

How does an escrow account work?

If you and your lender decide that an escrow account is needed after closing, here is what happens. Your lender will take your calculated property tax and the annual cost of home insurance, divide it by 12, and add that amount to your monthly mortgage payment.

Every month, you will pay your mortgage as usual, and the funds designated for property tax and insurance are diverted to the escrow account by your lender. Then, when it comes time to pay property taxes or insurance, it is taken directly out of the escrow account, so you don’t have to worry about it.

This is an added benefit to using an escrow account. Instead of paying for insurance and taxes as a lump sum, you can pay for them throughout the year and not worry about when payments are due.

Something to take note of is that your payments into escrow could fluctuate. Every year, the financial institution where your escrow account is held will perform an annual analysis on your account to determine if more or less needs to be paid into it. The increase or decrease could be due to a few reasons, such as a change in property taxes or home insurance, and your monthly mortgage payment could be adjusted based on the analysis.

We’re Here to Guide You

Helping you purchase your dream home is our highest priority. We know that learning and understanding everything about the home buying process can feel intimidating, which is why our lenders are here to guide you.

If you’re ready to learn more about how Blackhawk Bank can help you with the purchase of your next home, contact us today!

Tammy Zurfluh 

SVP Mortgage Banking

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