Establishing the Account

• Oftentimes the establishment of an escrow account is handled by the mortgage company supplying the funds and terms for repayment for the property. In cases where the escrow account is not established by the mortgage company, the buyer can set up the account to ensure a reliable payment of the taxes and property insurance. Most mortgage companies will require the establishment of an escrow account for homes purchased with a down payment of less than 20 percent. The penalties for not paying the property taxes or failing to maintain homeowner's insurance places the risk of nonpayment on the real property owner as well as the buyer.
  
  

Determining the Escrow Payment Amount

• The premiums for homeowner's insurance and estimated tax payments are added to each monthly mortgage installment. The mortgage payment is made up of the principal payment, the tax payment and the insurance premium. Annual insurance payments are divided by the number of mortgage payments over a year (usually 12 equal payments). The monthly insurance installment is added to the mortgage payment. The anticipated tax payment is divided by the number of mortgage payments and added to the mortgage payment amount.
  
  

Making Tax Payments and Insurance Premium Payments

• Escrow accounts ease the process for accounting and paying taxes and insurance premiums. Since the payments are combined within the monthly mortgage payment, the buyer does not have to calculate and adhere to a tax and insurance premium payment schedule. The payments are made automatically by the mortgage company. An escrow account provides the security for the mortgage company in knowing that the payments over the year are made and available for payment to the pertinent entities (government and insurance company). The payments to the insurance company vary in frequency, as do the tax payments. The buyer does not need to plan for the payments. as the additional payments as part of the mortgage payment will satisfy the respective payment schedules regardless.
  
  

Managing Risk and Reaping the enefits of an Escrow Account

• Several factors are considered in the lending process. The overall goal of the lender is to balance the risk of providing funds for the purchase of real property against safeguards to protect the investment. Mortgage companies will often add stipulations to the mortgage agreement as to the establishment of the escrow account. Buyers who establish an escrow account, or have one established by the mortgage company on their behalf, satisfy a certain burden of managing the risk for the lender. Lenders are more likely to approve a mortgage or offer more-favorable terms as a result of taking or agreeing to this step.