If you're obtaining a mortgage loan in order to buy a home, it's likely that your mortgage lender will require you to put money aside with them at closing to set up your escrow account (you may also hear this referred to as an impound account or referred to as "pre-paids" at the closing table).
What Is An Escrow Account?
Very simply, an escrow account is made up of money that your lender collects from you at closing, initially, and then every month as part of your mortgage payment. This money is used by the lender to then pay your annual property tax bill(s) and your homeowner's insurance policy renewal each year when it comes due. A simple explanation is that your lender wants to ensure that your property taxes are always paid on time and you keep homeowner's insurance on the property (usually a condition of your loan), and the easiest way for them to do that is to collect that money on a monthly basis and pay those bills on your behalf.
Am I Required To Have An Escrow Account?
While every mortgage lender is different, it's safe to assume that most will require you to set up an escrow account as a condition of your loan approval and at the time of your closing. They will collect a set amount of money as part of your closing costs, and then they will continue to collect prorated amounts on a monthly basis as part of your mortgage payment (your mortgage payment will typically be made up of four parts, nicknamed PITI, which stands for Principal, Interest, Taxes, Insurance).
Your lender or mortgage servicer may allow you to cancel or close your escrow account, receive those funds back, and pay your own property taxes and homeowner's insurance after you have a solid payment history with them, oftentimes 6 to 12 months of payment history. However, some may require you to keep your escrow account with them for longer.
I Have An Escrow Account But I Still Received My Property Tax Bill and Homeowner's Insurance Renewal Bill in the Mail -- What Do I Do With Them?
Even if you have an escrow account set up, you will very likely still receive your property tax assessment and bill (your county and/or city or municipality is required by law, in most cases to send them to you. Likewise with your homeowner's insurance renewal bill. You can always check your mortgage statement for the phone number (or even fax number) for the escrow division of your mortgage servicer and send a copy of the bills to them, but they will have also received the bills and will make the payments on your behalf.
What Do I Do If I Want To Change My Homeowner's Insurance Provider?
It's always a good idea to shop your insurance around and see if there's a better rate or better coverage options available to you. Just because you have an escrow account doesn't mean that you are locked into the homeowner's insurance provider that you chose when you bought your home.
An experienced insurance agent or broker will ask you if you are purchasing a new home or shopping for insurance on a property you already own, and they will also ask you if you have an escrow account with your mortgage servicer. They will then ask for your mortgage loan account number and the mortgagee clause, both of which you should be able to find either on your mortgage statement or when you log in to your mortgage company's online portal (or if you can't locate it i either of those places, by reaching out to your mortgage servicer). Once you've chosen a new homeowner's insurance provider, they will reach out to your mortgage servicer and establish your new policy. You will then receive a prorated refund from your current insurance provider for any fees that were already paid for the canceled policy.
What If My Property Taxes Or Homeowner's Insurance Amounts Change?
Your mortgage servicer is required to send you an annual escrow analysis statement, showing how much money you have in your escrow account and showing when and how much they have paid out for your property taxes and homeowner's insurance. When your property tax assessment comes out -- also annually -- your mortgage servicer will get your tax bill, usually following the end of the property tax appeal period. If your taxes have gone up, your mortgage servicer will send you a notice that your escrow account will reach a point of deficit. They may give you the option to pay the amount of the deficit in full in one lump sum, hence keeping your monthly mortgage payment the same, or to adjust your monthly mortgage payment amount going forward. If your property taxes go down (unlikely, but it does happen!), then you will get a similar notice from your mortgage servicer that your monthly mortgage payment will adjust down. Additionally, your mortgage company is not allowed to keep too much money in your escrow account, so you may receive a check in the mail for any overage. (NOTE: Even if you make your mortgage payments online, always open your statements from your mortgage company or check your amount due in your mortgage servicer's online portal.)
Similarly, if you change your homeowner's insurance carrier and choose a new policy or if you do substantial improvements to your home (i.e., you add a pool, finish your basement, or put on an addition), your homeowner's insurance will likely change, and your mortgage servicer will be notified by your current or new insurance carrier, likely leading to an adjustment of your mortgage payment based on the escrow analysis.
