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Understanding Your Escrow Account
What is an Escrow Account?
An escrow account is a third-party account that holds funds for property taxes and insurance premiums. Your mortgage servicer manages this account and pays these expenses on your behalf.
Key Benefits:
- Automatic payment of property taxes
- Timely insurance premium payments
- Better budget management
- Peace of mind
How is Escrow Calculated?
Basic Formula:
Monthly Escrow = (Annual Property Tax + Annual Insurance) / 12
Your escrow payment typically includes:
- Property taxes
- Homeowner's insurance
- Mortgage insurance (if applicable)
- Flood insurance (if required)
Frequently Asked Questions
Why do I need an escrow account?
An escrow account helps ensure your property taxes and insurance premiums are paid on time. It spreads these large annual costs into manageable monthly payments.
How often do escrow payments change?
Escrow payments are typically reviewed annually and may change based on property tax assessments and insurance premium adjustments.
What is an escrow cushion?
An escrow cushion is a small extra amount collected to cover any unexpected increases in taxes or insurance. Most lenders require a two-month cushion.
Tips for Managing Your Escrow Account
Review Annual Statements
Carefully review your annual escrow analysis statement to understand any changes in your monthly payment.
Monitor Tax Assessments
Keep track of your property tax assessments and appeal if you believe they're incorrect.
Shop Insurance Rates
Compare homeowner's insurance rates annually to ensure you're getting the best deal.