If you’re confused about what an escrow account is, today I’ll provide a quick definition. Want to Buy a Home? Search All Homes Want to Sell a Home? Get a Home Value Report

What is an escrow account?

An escrow account is what a mortgage company sets up when buyers get a loan to purchase a house. The account is comprised of funds that don’t apply to the principal or interest of your mortgage. In other words, they’ll go toward your property taxes and homeowners insurance. The payment for setting up your escrow account is included in the closing costs.

Every time you make a monthly payment to your mortgage company, they’ll take a piece of that check and put it into your escrow account. Usually, homeowners insurance is billed annually, so your mortgage company will use your escrow account to pay your bill when it’s due. That’s why your insurance company actually sends your mortgage company the bill.

“Every time you make a monthly payment to your mortgage company, they’ll take a piece of that check and put it into your escrow account.”

Here in Colorado, property taxes are paid in arrears, which means you can pay them in April, or pay half in February and half in June. Most mortgage companies prefer to split the payment. That way, after they make the first payment in February, they can collect interest on it until June.

When it’s time to sell your home, a lot of sellers have one question in particular at the closing table: Why is the title company billing me for taxes if I already paid them through my mortgage company? When you pay taxes to your mortgage company, those funds aren’t sent to the county—they’re held in your account. When you sell your home, to ensure there are no tax judgments against the new owner, the title company has to collect them from you at closing. You can either pay out of your equity or write them a check.

The mortgage company will then mail you a check three or four weeks after closing, so make sure they have your new forwarding address so you can get that money back.

As always, if you have questions about this or any other real estate topic, or you’re thinking of buying or selling a home soon, don’t hesitate to reach out to me. I’d be happy to help you.