The word escrow shows up twice in a home purchase, and the two accounts do different jobs. The escrow in this article is the mortgage escrow account: an account your lender or servicer sets up at closing and keeps for the life of the loan. It is not the earnest money escrow that holds your deposit before settlement. For buyers in Fairfax, the mortgage escrow account is the reason part of every monthly payment is already spoken for before the month begins.
Here is how the money moves. Your servicer estimates the yearly cost of your property taxes and homeowners insurance, and in some cases mortgage insurance or flood insurance as well, per Virginia Housing. Each month, a portion of your mortgage payment, typically one-twelfth of that estimated yearly total, goes into the escrow account instead of toward principal and interest. When a tax bill or insurance premium comes due, the servicer pays it from the account on your behalf. At closing in Alexandria, you will usually fund the account with an initial deposit, shown on your Closing Disclosure, so the balance is ready for the first bills that come due after you move in.
Once a year, your servicer runs an escrow analysis. Virginia Housing describes it as a projection of the account over the coming year, based on the taxes and insurance actually paid over the previous 12 months, and you receive a written copy. Because property taxes and insurance premiums change from year to year, the CFPB notes that your escrow payment, and with it your total monthly payment, changes too, even when your interest rate is fixed. If the analysis shows a shortage, the added cost is typically spread over the next 12 payments. If it shows a surplus, the servicer refunds it or adjusts your payment, following the rules that apply to your loan. Around Ashburn, where tax bills and insurance renewals both move, that annual statement is worth reading line by line rather than filing away.
Can you skip escrow and pay these bills yourself? Sometimes, but it depends on your loan. Many lenders require escrow so they can be sure the bills get paid, and the CFPB notes an escrow account may also be required by law for some loans. If your loan has no escrow account, the budgeting job is yours: the CFPB warns that unpaid property taxes can bring fines, penalties, or a tax lien, and a lender may respond to missed tax or insurance payments by adding an escrow account, adding the amounts to your loan balance, or buying insurance for the home and billing you for it. Even when escrow is optional, the CFPB suggests considering one voluntarily, because paying a little each month is easier than finding a large tax bill in the mail.
FAQ
Is a mortgage escrow account the same as my earnest money deposit?
No. Your earnest money is a good faith deposit held in escrow before settlement and credited to you at closing. A mortgage escrow account starts at closing and continues for the life of the loan, holding part of each monthly payment for property taxes and homeowners insurance, which your servicer pays when they come due.
Why did my monthly mortgage payment go up when my interest rate is fixed?
Most likely because your escrow payment changed. Your servicer reviews the account each year in an escrow analysis. If your property taxes or homeowners insurance premiums rose, the monthly amount collected for escrow rises with them, and your total payment rises too, even though your principal and interest stay the same.
What is an escrow shortage, and what happens next?
A shortage means the account does not hold enough to cover the taxes and insurance coming due, usually because those costs rose. Virginia Housing, for its own loans, spreads the added cost over the next 12 payments, which raises the escrow part of your monthly payment. Your annual escrow statement shows the projection and the new amount.
Can I close my escrow account and pay taxes and insurance myself?
It depends on your loan and your lender. Many lenders require escrow, and some loans require it by law, per the CFPB. If your lender allows you to pay directly, you take on the full bills when they come due, and missed tax or insurance payments can lead to penalties, a tax lien, or the lender adding an escrow account back to the loan.