Escrow Account: An Introduction for the First Time Home Buyer

As a first time home buyer, it will not be long into your home buying adventure before you are presented with the concept of escrow. Here is a quick introduction to escrow in the context of home insurance and property taxes.
Escrow Account - A Definition"A trust account held in the borrower's name to pay obligations such as property taxes and insurance premiums."
Escrow - How it WorksAn escrow account is opened and maintained by your mortgage lender. It is essentially a savings account in which deposits are automatically made with money from your monthly mortgage payment. Your property tax bills and insurance premiums are paid by the lender from the funds from the escrow account.
Why Does the Lender want to take on this Task?Your lender wants to make absolute sure that your home insurance premiums and property tax bills get paid. Your home is collateral for all of the money they lent you to purchase your home. If, for example your home is destroyed by fire and you are not covered by home insurance, that collateral is gone. Similarly, if you don't pay your property taxes and the state forecloses on your property, the bank again loses its collateral. This is a risk most lenders are not willing to take. An escrow account assures the mortgage lender that your taxes and insurance are paid.
Advantages for YouBudgeting for property taxes and homeowners insurance could not be easier - as it is done for you. Additionally, you can be sure that your home is covered in the event of a disaster and feel confident you are meeting your lenders requirements.
Confirm that your Payments were MadeIt is a good idea to confirm that your escrow items are paid on time and no late charges have been applied to your account. Lenders are required to make your payments in a timely manner as long as your mortgage payment to them is not more than 30 days overdue. If you lender was late on the payments and you receive a bill for late fees or penalties, forward this bill directly to your lender. As a matter-of-fact, if you receive any insurance or tax bills that are to be paid via your escrow account, also forward these to your lender.
Changes to Taxes or Insurance CostsEach year your lender will review your escrow account. You will receive a detailed statement including the total deposits made into the escrow account and the insurance and tax payments made on your behalf. Your lender will notify you of any excesses or shortages in your escrow account due to changes to your taxes or insurance costs. Typically, shortage amounts will be added to your next mortgage payment. By law, any excess of $50 or greater will be returned to you.
Open up (and read) that Homeowners PolicyYou will continue to receive an annual copy of your homeowners insurance policy. Because you won't be paying the bill yourself, you may get in the habit of simply filing the policy away without looking at it. This is a mistake! To confirm that your home is not over insured or under insured read your policy carefully.