The word escrow shows up a lot during a home purchase, and it actually refers to two different things. There’s the escrow process that happens during your transaction, and there’s the ongoing escrow account many buyers in Centerville and Washington Township end up with after closing. Understanding both can save you some confusion once you’re a homeowner.
Escrow During the Home-Buying Process
While your purchase is underway, an escrow or title company acts as a neutral third party holding funds and documents until every condition of the sale is met. Your earnest money deposit, for example, typically sits in escrow until closing. This version of escrow ends the day you close — the funds and paperwork are released, and ownership transfers to you.
The Ongoing Escrow Account After Closing
Separately, many mortgage lenders set up what’s sometimes called an escrow or impound account that continues for as long as you have the loan. Instead of paying property taxes and homeowners insurance yourself in large lump sums, a portion of those costs is collected each month as part of your mortgage payment. The lender holds those funds and pays your tax and insurance bills on your behalf when they’re due.
How Your Monthly Payment Is Calculated
Your lender estimates your annual property tax and insurance costs, divides that total by twelve, and adds it to your principal and interest payment. Lenders are also generally allowed to keep a small cushion in the account for unexpected increases. Because property taxes and insurance premiums can change from year to year, your required monthly escrow contribution can change too, even if your interest rate stays the same.
What Happens If Your Escrow Account Comes Up Short or Over
Lenders review escrow accounts annually. If taxes or insurance premiums went up more than expected, you may see a shortage, which usually means a temporary increase in your payment or a one-time catch-up amount. If the account built up more than it needed, you may receive a refund or see your payment adjusted down. Either way, your lender is required to send you an annual escrow statement explaining the math.
Frequently Asked Questions
Do I have to have an escrow account?
It depends on your loan type and down payment. Many conventional loans allow you to opt out once you have enough equity, while FHA, VA, and USDA loans typically require an escrow account for the life of the loan. Ask your lender what applies to your specific loan.
Can my escrow payment change after the first year?
Yes. Because escrow payments are based on estimated taxes and insurance, they’re recalculated each year based on actual costs, so your monthly payment can go up or down even if your mortgage rate never changes.
What happens to extra money in my escrow account?
If your account has more than it needs after the annual review, your lender will typically either refund the overage to you directly or apply it to lower your upcoming monthly payment, depending on the amount and your loan servicer’s policy.
Who manages my escrow account after closing?
Your loan servicer manages the account for as long as they service your loan. If your loan is later sold or transferred to a different servicer, which is common and normal, your new servicer takes over managing the escrow account going forward.
Kelly Nation is a real estate agent with RE/MAX Alliance serving Centerville, Ohio, Washington Township, and the greater Dayton area. Thinking about buying or selling in the area? Reach out to Kelly Nation with RE/MAX Alliance at 937-609-5852 to get started.
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Kelly Nation | RE/MAX Alliance
Local real estate guidance in Centerville, Washington Township, Kettering and nearby communities.