What Is Escrow?
Escrow is money that you have earned, paid taxes on, and then
agreed to give to someone else to hold on your behalf. For example, when you take out a mortgage
loan to purchase a house, the lender is named on the property title of that
house as the “lien holder”. This
identifies that the house is the collateral property that the bank has an
ownership interest in, until you pay off the loan. So if you don’t pay the
loan, the bank is “first in line” to take physical possession of the property
and basically, kick you out to the curb.
With real estate property, there are certain bills that have
to be paid on a regular basis. Property taxes
are one of those bills. If you don’t pay your property taxes, then the taxing
authority (usually the county) will “take possession” of your property and kick
you to the curb. The bank that lent you
the money to buy the house with, doesn’t want that to happen – otherwise the
bank could lose their money too. Besides, if you’re not paying your property
taxes, you’re probably not making those loan payments to the bank either. The
bank is in this to make money, and they’re not about to risk losing a $200,000
property to the taxing authority, because you didn’t pay a $1200 property tax
bill.
To protect their interest, the bank will require you to
include as a part of your house payment each month, a pre-determined amount of
money that is in addition to the loan payment. This additional money is placed
in an escrow account. It’s still your money. But the bank has possession of it.
The bank will use your money in the escrow account, to pay your property tax
bill when it’s due. Understand that since escrow money is your money, the bank
isn’t paying the property tax – you are. The bank just pays it with your money,
on your behalf. That way, the bank has no doubt, taxes are paid and they are
not at risk of losing their collateral to someone else. So money in escrow is
NOT a deduction EVER on any tax return, so long as it remains in the escrow
account.
