ESCROW

Escrow is usually referred to an escrow account  which is a special account that a borrower can establish with a lender once a transaction is completed. The purpose of this account is to set aside the necessary funds to pay for items such as property taxes and homeowner's insurance. In setting up the account, the provision is established for a monthly payment to exceed the principal and the interest of the loan sufficiently to cover the cost of these additional items when they become due. Several benefits exist as a result of setting up an escrow account:

 

Substantially less chances of a borrower defaulting on the loan. Homeowners are protected by a guarantee that these additional costs, typically with different due dates, are paid on time.

 

The mortgage loan can typically be established with a lower down payment and/or a lower interest rate, because escrowed funds from the borrower are an added security to lenders.

 

The mortgage lender will take care of any short fall that may occur. In the event insurance or tax payments increase, the mortgage lender will typically cover the difference, make the payment, and afterwards will adjust your payment schedule to include recovery from the short fall and any anticipated increases for the future.

 

You, the borrower, are insulated from any unwanted surprises, because the mortgage lender has the responsibility of keeping a pulse on the market and anticipating increases in tax and insurance payments.