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An escrow account is used to make payments on real estate taxes and homeowners insurance, which is setup by your lender.

How does an escrow account work?

When you pay your monthly mortgage, not all the money you pay goes towards your interest or principal payments. Your lender will also collect money that’s for real estate taxes and homeowners insurance, which are paid biannually or annually. In other words, you’ll pay 1/12th of your yearly tax and insurance bills when you make each monthly mortgage payment.

This helps to ensure your bills are paid in full and on time, without you having to budget for these large payments separately or worry about them. Your escrow account is setup at closing.

Typically, there is a minimum amount required in your escrow account. For most, this minimum equals about two months of escrow payments.

When it comes time to pay your real estate taxes and homeowners insurance bills, there are a few reasons why there could be a shortage in your escrow account:
• Increase in property taxes and/or insurance premiums
• Tax reassessments
• Insurance carrier charges
• Change of due dates
• Fewer escrow deposits than expected

At the end of the year, you will receive an escrow analysis. This is a statement that includes a history of your activity on your account this year and the expected activity for the next year.

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VIDEO TRANSCRIPT:

JONATHAN: An escrow account is a separate account that is set up that the bank sets up to pay your property taxes and your homeowner’s insurance.

TINA: we do collect it on a monthly basis for you for tax and insurance so that when it comes due on an annual basis we pay for the full amount through your escrow account, so you don’t have to worry about saving it on the side.

TAMARA: Escrow account for the lender, it’s a good thing for the lender because we are able to ensure that your taxes are being paid in a timely fashion.

TAMARA: For the homebuyer, you don’t need to worry about collecting money and putting it in a separate savings account so that you have to come up with the money at a later time.

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