Updated: Jan 7, 2020

You just bought your first home and are getting ready to make your monthly mortgage payment. In addition to principal and interest, your payment may also include an escrow payment.

Escrow payments are common and many lenders require that an escrow — or reserve — account be established under the terms of your mortgage. Your monthly escrow payment is designed to cover a portion of your estimated annual costs for property taxes and insurance premiums such as homeowners insurance. Your lender will deposit this amount into your escrow account and will pay for both items on your behalf when they are due.

Lenders will estimate your homeowners insurance premium and real–estate property taxes yearly. It's important to remember that it's an estimate, so at the end of the year you may get a refund or have to pay extra for a shortfall.

Your taxes and insurance premiums will change over time and your escrow payment estimate will be adjusted yearly to reflect any changes.

Check your year–end escrow statement carefully to make sure your bills are being paid and there are no mistakes. If you have questions or find a problem, contact your lender immediately as these payments are ultimately your responsibility.

Regularly scheduled escrow payments are a good option for many homeowners because they eliminate the surprise of a large annual payment when your property taxes or insurance premiums are due.

Talk to your lender about your escrow options as you may have the option to cancel your escrow payments once you have built up at least 20% equity in your home and are current on your payments. Just remember that you'll then be responsible for paying your taxes and insurance directly in full and on time.

Source: Freddie Mac

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