Escrow accounts are set up by lending agencies for those who take out a home mortgage. Many homeowners may be confused as to what an escrow account is and what it’s supposed to do. Here are some answers to common questions regarding escrow.

What Is An Escrow Account?

An escrow account is an account set up by a lender to automatically save money for major expenses that a mortgage borrower will have to pay over the course of a year. The most common expenses are property taxes and homeowners insurance. Those who put no or little money down might also have PMI insurance or annual government fees saved in an escrow account. The purpose of an escrow account is primarily to protect the lender. Those who fail to pay their property taxes will have a lien placed on the house, which could lead to a foreclosure. By saving the amount of the property tax for the borrower, the lender can pay the bill and make sure that the tax is paid up.

Is An Escrow Account Required?

An escrow account is usually required by a lender as a condition of receiving a loan. As noted in the answer above, a lender wants to protect itself against the eventuality that a borrower might not keep up with tax and insurance payments. Should they fail to keep up with these payments, the lender could be at serious financial risk.

Can Escrow Payments Increase?

Escrow requirements can definitely increase over time. Houses are reassessed periodically to determine how much tax a homeowner will owe. When the assessed value of a home goes up, the tax owed will likely go up as well. To make sure that the borrower is able to keep up with the taxes and to avoid foreclosure, a lender will increase the amount that a borrower will have to put toward the escrow account each month. Additionally, homeowners insurance can also go up and lead to an increase in the escrow payment required.

Are Property Taxes In Escrow Deductible?

The money in an escrow account that goes toward property taxes will generally be tax deductible. However, it’s important to remember that there are two stipulations tied to the ability to deduct the property taxes paid from an escrow account. First, the borrower must be able to itemize to actually benefit from the deduction. Second, there are limits to the available deduction. As a result of the 2018 tax reform, only the first $10,000 of property taxes are deductible.