Understanding an Escrow Account

Sometimes you encounter home buyers that do not understand the purpose of an escrow account.  These are separate reserve accounts setup by a mortgage company to pay your homeowners insurance and property taxes when due.  From each mortgage payment, your mortgage company will set aside a required amount to pay your insurance premium and taxes.  These amounts are an estimated amount determine by the mortgage company.   Each year, the mortgage company may adjust the amount to be set aside in your escrow reserve accounts.  If this occurs, your monthly mortgage payment will be adjusted either upward or downward.  By law, mortgage companies have maximum limits they can reserve in each account.  If they exceed these limits, mortgage companies are required to refund monies back to you.   The advantage of escrow accounts, it is a force savings account which guarantees' there will monies available to pay your taxes and insurance.  The disadvantage to escrow accounts, you are unable to earn interest on those funds.  In case your financial institution fails to make the required payment for taxes and/or insurance, make sure you are not penalized for the late payment, your mortgage company is responsible for these payments.