Interest Bearing Escrow Accounts

An escrow account is an account established with a bank to hold funds as an intermediary between two parties involved in a transaction. The most common type of escrow account is a mortgage escrow account, which collects regular payments from a borrower and uses the funds to make required tax and insurance disbursements. Some states require that escrow accounts accrue interest.

Each month when you make your mortgage payment, you will also pay a certain amount of money into your mortgage escrow account. The bank uses the funds in this account for predetermined purposes, such as paying your homeowner's insurance premiums or property taxes. In most cases, the bank that holds this account will be responsible for using the funds to pay your bills in full and on time.

As of 2011, there is no law in place requiring all lenders to apply interest to mortgage escrow accounts. However, 14 states currently require their lenders to provide interest-bearing escrow accounts under certain circumstances. These states include California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont and Wisconsin. The specific regulations governing interest-bearing escrow accounts differ by state.

Most banks will only pay interest for escrow accounts associated with residential properties. The escrow account must also have been a requirement of the lender, and the bank must use the funds in the account to pay property taxes or homeowner's insurance. Typically, a state will only require interest-bearing escrow accounts for loans originated after a certain date. The interest on a mortgage escrow account is taxable.

The interest that accrues on an escrow account is often lower than what you could receive on a different type of account. Though most escrow accounts that accrue interest are accounts that the lender required, some lenders might offer an optional interest-bearing escrow account. In this case, you should compare the interest rate offered with the interest rates of other savings accounts.