Why Lenders Escrow for Taxes and Insurance
Homeowners are responsible for paying their monthly mortgage payments as well as annual real
estate taxes and homeowner’s insurance. Oftentimes, lenders will require that you set up an
escrow account for taxes and insurance.
With an escrow account, your combined monthly payment includes a mortgage payment and
1/12th of the real estate taxes and homeowner’s insurance. This way, the annual property tax, and
insurance payments are split into more manageable monthly chunks that are paid throughout the
When the taxes and insurance premiums come due, your lender uses the funds in the escrow
account to pay for these items on your behalf. Lenders want to make sure that real estate taxes are
paid promptly because unpaid property taxes are a superior lien to the rights of the lender.
FHA loans mandate that the lender escrow funds for taxes and insurance – and on a conventional
mortgage with a down payment of less than 20% of the purchase price – an escrow account is also