Are you in the process of buying a house and getting a mortgage to go through with the purchase? If this is something you are working on, you should learn more about what an escrow account is because you will probably be required to have one with your loan. Here are some things to know about escrow accounts, including the purpose of one, how it works, and why you need one.

What It Is

When you hear the term "escrow account" in relation to your mortgage loan, it basically refers to a bank account you will use with your home buying loan. This bank account holds money and does not earn interest for you or the lender. You put money into the account each month, and this causes the balance to grow. You cannot touch this money at any time, even though it is technically your account.

The Purpose of an Escrow Account

Escrow accounts serve one main purpose, which is to help homeowners save up for two big expenses – homeowner's insurance premiums and property tax payments. Without an escrow, you would be responsible to save up yourself for these expenses and then to pay them. If you have an escrow, it makes this whole process a lot easier.

How It Works

An escrow account works by the lender adding up the costs for these two expenses for the year. The lender then divides the annual costs by 12 months to come up with a monthly payment amount. When you pay your mortgage payment every month, you must pay the monthly escrow payment too. The lender places the money in your escrow account and pays your two big expenses when they are due.

Why You Need One

Having an escrow account with your mortgage is not something that all homeowners like, but there are some major benefits. For one, it eliminates the need for you to save this money on your own. Secondly, you do not have to worry about paying the taxes or insurance when they are due; your lender does this for you.

The reason lenders often require these is to protect themselves. If they require escrow accounts, they can monitor a borrower's tax status and insurance status, which are both highly important aspects of loans issued by a lender.

There are lenders that do not require escrow accounts, but most do. If you have questions about this or other mortgage-related issues, talk to a lender today.