An Escrow Account ( also called “Impound Account” ) on your loan allows lenders to make payments for certain bills related to your property, such as property taxes, homeowners insurance and mortgage insurance. It is an easy way for homeowners to manage the payments on the property. You don’t have to save for them separately because you make one monthly payment where:
Part goes toward your mortgage to pay your principal and interest.
The other part goes into your escrow account for property taxes and insurance premiums.
Home owners are generally required to have an escrow account unless a certain loan to value ratio is met. Lenders may also offer some incentives to encourage homeowners to set up escrow account with the lenders.
Every year you’ll receive an Annual Escrow Account Disclosure Statement that details the activity in the account for the year, as well as a projection for the next year’s payments. Since property tax and home insurance premium can increase or decrease from year over year, your escrow account may have a shortage or surplus. In the case of a shortage, the difference between your previous bill amount and current bill amount will be divided by 12 and added to your monthly escrow payments. You can also choose to pay the shortage up front in a lump sum. In the case of a surplus, the difference between your previous and current bills will be returned to you.