What Is Escrow: Explained For First-Time Home Buyers [VIDEO]

Video Transcript

When your mortgage payment gets made each month, you’re paying for more than just your mortgage loan. You’re also paying a portion of your real estate tax bill and your homeowners insurance policies. In the industry, lumping these payments into one is known as escrow.

As in the “escrow” of your taxes and insurance. When you escrow your mortgage, your monthly mortgage payment is made of four parts. The first two, your principal and interest payments, are what we traditionally think of when we say “mortgage payment” – it’s your repayment to your lender based on how much you borrowed and at what interest rate.

The second two parts of an escrowed loan are the one-month portions of your annual real estate tax bill and your annual homeowners insurance bill. These two payments don’t go to your lender directly. Instead, they get held in a separate account – called an escrow account – that account builds up and is used to pay your bills for you.

When your real estate taxes are due or your homeowners insurance renews, you’re not making the payment – from your bank account – your lender pays it for you – with money – you’ve already given them – for expressly this purpose. Now – it is extra work for a mortgage lender to manage your bills like this for you – but they’re happy to do it because an escrowed loan is safer to the lender. Because they’re making the payments – on your behalf – they know that your real estate tax bill will get paid on-time which eliminates the risk of delinquency and tax liens from the local taxing authorities – and that prevents a lapse in homeowner insurance coverage – which can coincide with a major damage toa home – which is why, many times, you get your best mortgage pricing comes when you allow your lender to escrow.

Less risk to the lender, lower rates to you. I’m Dan with Homebuyer.com, the mortgage lender for first-time buyers. Happy homebuying.