What Does an Escrow Payment on a Mortgage Mean?

by Casey Holley ; Updated June 13, 2017
Escrow accounts are meant to help prevent tax related foreclosures.

When you are looking into purchasing a home, you may notice that many lenders require you to deposit a certain amount of money into an escrow account. While it may be possible to bypass having to use an escrow account, many borrowers will have to comply with the escrow requirements in order to secure a home loan. This is usually the case for first-time homebuyers or homebuyers with less than perfect credit.


An escrow account is a special account in which the homeowner deposits funds that are used to pay property taxes and insurance premiums. Monies for the escrow account are paid in addition to the regular mortgage amount each month. Some loans, such as FHA-backed loans require an escrow account to reduce the rate of foreclosure due to inability to pay property taxes.


According to the state of Michigan, most lenders that use escrow accounts collect 1/12 of the annual property taxes and insurance premiums each month. Lenders are allowed to collect up to 1/6 more than the actual total of the taxes and insurance on the property. This is in case the property taxes or insurance premiums increase.

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Escrow Holder

The escrow account is maintained by a third party, meaning the money isn’t held by you or your mortgage company. It is up to the borrower who the escrow holder is, but the mortgage company must agree to the escrow holder. In most cases, the mortgage company will suggest an escrow company; however, it is still wise to do your research to ensure that you choose a company that meets your needs and requirements. For example, fees vary from one escrow holder to another, so be sure to find one that is reputable and cost effective.


One of the main benefits of an escrow account is that the money for property taxes is collected over a period of 12 months. Without the escrow account, you may find it difficult to come up with the money to pay your taxes all at once. Another benefit of an escrow account is that the escrow holder is liable for paying for the insurance and taxes on your property. If the escrow holder fails to do so, it is the escrow holder, not you, who is held liable.


Escrow accounts, in most cases, don’t accrue interest. This, coupled with the fees charged by the escrow holding company, may seem like a significant disadvantage to the borrower. Because loans that have an escrow account usually have a slightly lower interest rate, the borrower may save money on the interest of the mortgage. However, in the case of a home loan that requires a significant escrow payment, the loss of interest that the borrower could have made can be greater than the savings in interest on the mortgage.

About the Author

Casey Holley is a medical writer who began working in the health and fitness industries in 1995, while still in high school. She has worked as a nutrition consultant and has written numerous health and wellness articles for various online publications. She has also served in the Navy and is pursuing a Bachelor of Science in health administration from the University of Phoenix.

Photo Credits

  • Image by Flickr.com, courtesy of Jeff Turner
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