An escrow account is a savings account that's set up by a lender when you take out a mortgage. Its purpose is to allow you to set aside a portion of your monthly mortgage payment to cover the costs of annual fees like property taxes and homeowner's insurance premiums. An escrow account generally requires that you pay an amount equal to 1/12th (one-twelfth) of your total estimated annual fees into the account each month. The lender is then responsible for using the money in your account to pay your bills when they're due at the end of each year. Escrow accounts are important because they automatically budget your tax and insurance responsibilities regarding your house over the course of a year. As a result, you don't have to worry about coming up with several large sums of money when it comes time to pay for these expenses. You also avoid the risk of lapsed insurance coverage or delinquent taxes. When you use an escrow account, make sure you're not penalized for any late payments as it's the lender's responsibility to pay your bills in a timely fashion. However, you're responsible for determining whether your escrow payments are correct and for requesting correction of payments if they aren't. Remember that lenders must manage your escrow account in compliance with U.S. federal law and issue you an itemized statement of your payments on an annual basis.
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