Escrow Accounts - A First Time Homebuyer’s Guide

Many first-time homebuyers aren’t familiar with how mortgage escrow accounts work. An escrow account is set up by the lender to collect and hold funds for certain property-related expenses, most commonly property taxes and homeowners’ insurance.

How Does It Work?

Instead of you having to save up a lump sum for your property taxes and insurance each year, your lender handles the process for you. Each month, when you make your mortgage payment, a small portion is set aside and deposited into your escrow account.

Here’s the simple math: your annual property tax and insurance costs are divided by 12. That amount is then added to your monthly principal and interest payment.

Example: If your annual property tax is $2,400 and your annual homeowners' insurance is $1,200, that's a total of $3,600. $3,600 / 12 months = $300 per month. So, an extra $300 is collected with your monthly mortgage payment and held safely in your escrow account.

When it's time for those annual payments to be made, your lender pays them directly from the funds that have been collecting in your escrow account.

Why Is This So Important?

For first-time homebuyers, this system is a lifesaver. It removes the stress of having to save thousands of dollars each year for large, unexpected bills. It also ensures that your taxes and insurance never lapse, protecting your investment and keeping you in good standing with your lender.

In short, your mortgage escrow account is a simple, safe, and smart way to manage the costs of homeownership.