How Escrow Accounts Work: Do Escrow Accounts Earn Interest?

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When you purchase a home with the help of a lender, the lender will likely set up an escrow account for you as well. The lender collects the money from you on a monthly basis for property taxes and homeowner's insurance, holds it in the escrow account, and then pays those bills on your behalf when they come due. For the lender, the main purpose of an escrow account is to protect their lienholder interest in your home. The borrower benefits by spreading out payments on a monthly basis for bills that are due semi-annually or annually.

Ready to set up an escrow account for your new home? Contact our lending specialists today to get started!

How does an escrow account work?

When establishing an escrow account, your lender will calculate the total annual payments for your property taxes and homeowner's insurance. The annual amount will then be divided by 12 to calculate your monthly escrow payment. This monthly amount is added to your principal and interest payment to make your total mortgage payment. You might hear your full monthly payment referred to by the acronym "PITI", for Principal, Interest, Taxes & Insurance. Lenders also typically require you to maintain a cushion of two months of escrow payments in the account at all times.

Every year, your lender will review your escrow account to ensure it has the right amount of funds. The lender will recalculate your payments based on the previous year's property tax and insurance costs. If there were a shortage or a deficiency within your account, your lender will spread the amount of your shortage and/or deficiency over the next 12 months which will result in an increased mortgage payment the following year. You also have the option of making a one-time payment for the shortage and/or deficiency amount. These amounts are detailed on your annual escrow analysis statement. **

If there was an overage in your account > $50, your lender will disburse these funds to you in the form of a check and if the amount is < $50, the lender will spread this amount as a credit over 12 months and possibly decreasing your escrow payment for next year.

**A one-time payment for your shortage/deficiency requires special handling. You may make your payment online, in-person or by mail, however, please email loanservicing@salemfive.com notifying us of your choice to make your shortage/deficiency payment, including your loan number and payment amount, so that your mortgage payment the following year can be adjusted in accordance with your escrow analysis statement. You may also reach out to our contact center at (800) 850-5000 for assistance.

Have questions about the interest rates on your escrow account? Schedule a free consultation with one of our experts to get all the answers!

Advantages of Escrow Accounts

Budgeting and bill payment will be simpler because you do not have to think about setting aside money to make your annual or semi-annual property tax and homeowner's insurance payments. Depending on where you live and your lender, your escrow account may pay interest on the account balance. Do escrow accounts earn interest? Yes, the interest rate on your escrow account might be higher than market rates on other types of personal deposit accounts, benefiting you over time.

Disadvantages of Escrow Accounts

When closing on your home mortgage, you will typically need to come up with more money to establish the buffer of two months payments in your escrow account. Your monthly mortgage payment is larger when you have to make a payment into an escrow account in addition to your regular principal and interest payment. The bank gets to hold your money, rather than you retaining control and having the money available to make investments.

You'll find that managing your property taxes and homeowner's insurance through an escrow account is a common practice with lenders. Typically, you'll need to have put at least 20% down on your home, be a prior homeowner, or have a large cushion in your bank account. If you choose to forego the escrow account, you should budget carefully to ensure you have the money available to make your property tax and homeowner's insurance payments when they are due.

If you’re asking yourself “where can I find escrow services near me”, SalemFive offers reliable and comprehensive escrow services tailored to meet your property tax and insurance management needs efficiently.

Ready to simplify your home financing? Contact Salem Five today to learn more about our escrow services and get started with a personalized plan that works for you!