Escrow Account Basics – Part 1

19 Oct Escrow Account Basics – Part 1

A escrow account is a separate account for holding client’s/customers money. Many mortgage loans require an escrow account be set up when a home is purchased for payment of property taxes and insurance. The type of loan typically determines whether or not a loan is escrowed. Some governmental loan programs require an escrow account as a condition of the loan. For example, FHA and VA (both govenment issured) loans require an escrow account as a condition to funding the loan, and establishment of the escrow account cannot be waived or altered. If a borrower has a conventional loan and does not have PMI (Private Mortage Insurance), the borrower has the option of paying the real property taxes and insurance directly without an escrow account.

The benefits of a escrow account include: (1) providing borrowers with a monthly forced “payment plan” where the monthly payments for taxes and insurance accumulate so that the funds are available to pay the taxing authorities a the end of the year – usually at no additional cost to the borrower; (2) the ability to pay only one creditor for the mortgage, taxes and insurance; and (3) ensuring the timely payment of taxes to taxing authorities. An escrow account is really good for people who do not have the self discipline to save the money to pay at the end of the year. The primary disadvantage of a escrow account is the borrower loses out on the interest the money being paid into the escrow account could earn.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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