Buying a home can be complicated with many legal and financial considerations. One of the terms you may come across during the process is “escrow.” But what does it mean to escrow taxes and insurance? In this article, we’ll explain everything you need to know about escrow for taxes and insurance, including how it works, its benefits, and how to set up an escrow account.

What is Escrow? 

A third party holds and regulates the payment of funds and/or property until a specific event or action is complete in a legal arrangement called escrow. For example, in real estate transactions, an escrow service is commonly used to hold the money and documents related to the transaction until all conditions are met. This ensures that both the buyer and seller are protected during the transaction.

The lender likes a bit of extra security when it comes to mortgage loans – whether you’re refinancing or buying from scratch. That’s why they usually require that an escrow account be set up; it insulates them from taking any financial losses due to defaulted payments and other problems that can arise.

Escrow is essential protection for lenders in cases of unexpected repairs and expenses, ensuring they have a reliable source of funds to draw on to settle issues quickly should they occur. Plus, having this kind of built-in protection also means peace of mind for homeowners, knowing they can always access the necessary funds regardless of their current financial status.

How Does Escrow Work for Taxes and Insurance? 

In mortgage lending, escrow is a common practice in which the lender holds the borrower’s funds for property taxes and insurance until they are due. The lender requires the borrower to escrow these funds to ensure they are paid on time and that the property remains insured. The borrower makes monthly payments to the lender, including the amounts for taxes and insurance. The lender holds these funds in an escrow account.

Calculating a home’s monthly escrow payment is simple. Just take the sum of the annual real estate tax bill and insurance bill, then divide it by 12 months in the year. For example, a $4,000 yearly tax bill with an $800 insurance policy = $4,800 annually = $400 paid into escrow monthly. These monies are collected as part of the regular mortgage payment and the mortgage’s scheduled principal + interest payment.

Benefits of Escrow for Taxes and Insurance 

Setting up an escrow account for taxes and insurance can benefit the borrower and lender. Some of these benefits include:

• Easier budgeting for the borrower: By having taxes and insurance in their monthly mortgage payment, the borrower can avoid large annual or bi-annual payments and better budget their expenses.
• Reduced risk of missed payments: Because the lender is responsible for paying taxes and insurance from the escrow account, the borrower doesn’t have to worry about missing a payment and risking penalties or losing their insurance coverage.
• Protection for the lender: By requiring borrowers to escrow funds for taxes and insurance, lenders ensure that the property remains insured and that property taxes are paid on time. This protects their investment and helps avoid potential legal issues.

How to Set Up an Escrow Account for Taxes and Insurance

The process is relatively straightforward if you’re a homeowner with a mortgage and want to set up an escrow account for taxes and insurance. Here are the steps to follow:

1. Contact your lender: Start by contacting your lender and requesting an escrow account for taxes and insurance.
2. Provide documentation: Your lender will likely require documentation related to your taxes and insurance, such as proof of insurance coverage and property tax bills.
3. Set up automatic payments: Your lender will set up automatic payments from your escrow account for taxes and insurance, so make sure you have enough funds to cover these payments.

Conclusion

Setting up an escrow account for taxes and insurance is crucial to the mortgage lending process. It provides numerous benefits for both borrowers and lenders. By opting for an escrow account, borrowers can enjoy easier budgeting and a reduced risk of missed payments. At the same time, lenders can protect their investments and avoid potential legal issues. To set up an escrow account for your mortgage, reach out to your lender, and they will guide you through the process.