Escrow can mean a couple of things. Escrow is the holding of money by a neutral third party for individuals involved in a business transaction. For example, when you place a bid on a home to purchase you will normally provide an earnest money deposit to show your good faith and interest in the property. This money will be held in escrow by a third party, usually a title company or attorney until the transaction is complete.If you refinance your home your new lender will be required to establish their own escrow for taxes and insurance, since the property taxes and insurance premium are now their responsibility. When your old mortgage is paid off you will receive a refund check for the current balance of your escrow account. This ensures that you are not being charged twice for your property taxes, or hazard insurance.
Escrow instructions must be followed exactly.
If you decide to escrow your property taxes and home owners insurance you should be prepared to have higher closing costs. The escrow account will require an initial deposit so that when added to the monthly payments the account will have enough funds to pay the taxes and insurance when they are due.
Escrow can also refer to an account that is set up at the time a mortgage is created. This account holds an initial balance, and is added to on a monthly basis. The additional funds to the account are included in the borrowers mortgage payment. The escrow account will be used to pay future property tax installments, as well as future hazard insurance premiums.
When you do decide to escrow, you need to realize that the lender will take a couple of months extra payments for reserves. This is in case your property taxes increase, the money will be there when it is time for you to pay your property taxes.
Example: If you purchase your home in March, most lenders will collect 5 months worth of escrow from you. You will get a credit for the months that you were not living in the house.
