Escrow by definition is: "A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled."

Escrow explained without the heretos, wherefores and thereintos: An escrow is really just a place that important things such as money, purchase agreements or deeds are kept until certain obligations are met by both parties. Once these obligations are met, the items in escrow can be dispersed and everyone is happy.

There are different types of escrow accounts. If you are having your home built, your builder may keep an escrow account that will hold your deposit money. This should be used as your down payment at closing or could be returned to you if you change your mind on purchasing the home for some reason. The escrow account that is most common, is the one that holds your property tax and insurance payments. Your lender will typically add the cost of your property tax and your insurance together and then divide by 12 to come up with your additional monthly payment. This amount will be collected each month in addition to your payment for your principal plus interest.

Do I have to have an Escrow Account?

It is entirely up to the lender. Some lenders will allow for you to make your annual tax and insurance payments on your own. However, some lenders require an escrow account to ensure that all bills are paid and their are no liens placed on the home. An escrow account also ensures that in the case of natural disaster, the insurance is up to date and no losses will ensue to the lender.

What does an Escrow Account do for me?

Let's say that your annual property taxes are $3,000 and your insurance is $600, without an escrow account you will need to come up with $3,600 at the end of the year when your taxes and insurance are due. With an escrow you will pay $300 extra every month with your mortgage payment. If you're good at saving money, then maybe you won't need an escrow account. If you are like me and would rather spend that extra money on a nice vacation and deal with the $3,600 later, an escrow account would probably be the better choice for you.

Setting up an escrow account with your mortgage lender could bring the possibility of a lower interest rate on your loan.

You will need to bring money to the closing to fund an escrow account. You are allowed a cushion, by law, of no more than 2 months worth of payments. This way the escrow account will always have a balance and you will have piece of mind.

If you have an escrow account it is the lenders responsibility to see to it that your tax bills and insurance are paid on time. If you lender does not make your payments on time, it is also their responsibility to pay any and all penalties.

While it may seem to be a bit of money up front to have an escrow account with a nice little cushion in it, think of it as a form of forced savings!