How does mortgage escrow work?

A typical monthly mortgage is comprised of PITI — principal, interest, taxes and insurance. Even if you have a fixed interest rate, it is entirely possible that your monthly mortgage payment will adjust at least once per year due to the mortgage escrow.

A mortgage escrow is the monthly amount that you pay toward the mortgage taxes and mortgage insurance. It is set aside in a special fund until the property taxes and homeowners insurance bills are sent. At that time, the insurance or taxes are paid from the funds that have accumulated in the escrow account. However, each year the insurance or property taxes can increase, so the monthly escrow amount is only an estimate that will be recalculated based upon the anticipated fees required for the following year.

An escrow account is a convenient way to assure the funds are there when you need them, but some people prefer to handle the payment of homeowners insurance or property taxes personally. It is possible to eliminate the escrow amount but it depends upon the mortgage company. In some cases, you may be required to pay a small fee to eliminate escrow.

Whether you have property taxes and homeowners insurance escrowed or pay it yourself, be sure to verify the bills are paid on time each and every year. Even if the funds are escrowed, it is still your responsibility as the homeowner to make sure the payments are sent and credited on time. If your mortgage has been transferred or you change insurance providers, it is imperative that you send written documentation of changes to ensure proper notification and payment.

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