One thing that comes up all the time during the home buying process is escrow accounts.

Some homeowners have one and never think twice about it… while others hear the word “escrow” and instantly feel confused or overwhelmed.

The good news? Escrow accounts are actually much simpler than they sound.

So let’s break it down in plain English.

What Is an Escrow Account?

An escrow account is basically a savings account your mortgage company manages for you.

Instead of paying property taxes and homeowners insurance separately when they come due, a portion of those costs gets included in your monthly mortgage payment each month and set aside throughout the year.

Then, when those bills are due, the lender pays them on your behalf.

Think of it as a built-in budgeting tool for homeownership.

Why Do Lenders Like Escrow Accounts?

Because property taxes and homeowners insurance are important.

If those bills don’t get paid, it can create major issues for both the homeowner and the lender.

Escrow helps make sure:

Taxes stay current
Insurance stays active
Homeowners avoid large surprise bills

For many people, it also makes monthly budgeting much easier because everything is combined into one payment.

Do You Have to Have an Escrow Account?

Sometimes yes. Sometimes no.

If you’re putting a smaller amount down on a home, escrow is often required by the lender.

But if you’re putting more money down or have enough equity in the home, some loan programs may allow you to waive escrow and pay taxes and insurance on your own.

Neither option is necessarily better. It really comes down to:

Your comfort level
Your budgeting style
Your loan program guidelines

Why Some Homeowners Love Escrow Accounts

Many people prefer escrow because it keeps things simple.

Benefits of Escrow:

One monthly mortgage payment
Less to remember
Easier monthly budgeting
No large tax or insurance bills showing up unexpectedly

Others prefer managing taxes and insurance themselves because they like having more control over their money month to month.

Again, there’s really no “right” or “wrong” option.

One Important Thing Most Buyers Don’t Realize

Your escrow payment can change over time.

Why?

Because property taxes and homeowners insurance can change over time too.

So if your mortgage payment suddenly increases one year, escrow is often the reason why.

This is one of the biggest surprises for many first-time homebuyers.

Why Are Escrow Funds Collected at Closing?

This is another area that catches buyers off guard.

At closing, lenders usually collect a few months of property taxes and homeowners insurance upfront to help “seed” the escrow account.

This simply helps make sure there’s enough money available when those bills come due.

It’s not an extra fee.

It’s money being set aside for future tax and insurance payments.

Simple Michigan Escrow Example

Let’s say your yearly housing expenses look like this:

Summer taxes: $4,000
Winter taxes: $2,000
Homeowners insurance: $1,200

Total Annual Escrow Bills = $7,200

Your lender divides that amount over 12 months.

That means approximately:

$500/month goes toward taxes
$100/month goes toward insurance

Total Monthly Escrow Portion = About $600

Why Timing Matters

Here’s where buyers sometimes get confused.

Let’s say you close on your home in January, but your first mortgage payment isn’t due until March.

By the time Summer taxes are due in July, you’ve only made four mortgage payments:

March
April
May
June

Using the example above:

Summer taxes due in July = Approximately $4,000
Monthly amount collected toward summer taxes = About $333/month
After four payments, only about $1,300 has been collected

So the lender collects the remaining amount upfront at closing to make sure enough money is available to pay the tax bill on time.

This is why escrow funds collected at closing can sometimes feel much higher than expected.

Escrow Funds vs. Tax Prorations

These are not the same thing, and this is another common point of confusion.

Tax Prorations

Tax prorations are funds paid back to the seller for property taxes they may have already paid during the portion of the year they owned the home.

Prorations simply make sure each party pays their fair share based on how long they owned the property.

Escrow Funds

Escrow funds are money being set aside for future tax and insurance payments.

And just to clarify:

You still pay tax prorations whether you choose to escrow or not.

One Last Thing Michigan Homeowners Should Know

In Michigan, property taxes are often reassessed after a home is sold.

That means the previous owner may have been paying much lower taxes than what the new homeowner will pay after reassessment.

Because of that, escrow payments can increase during the first year after buying a home.

When taxes or insurance increase, the lender performs an annual escrow analysis to make sure enough money is being collected to cover future bills.

If there’s a shortage in the escrow account, the monthly payment may increase to make up the difference.

This is extremely common for first-time homebuyers, and one of the reasons I always encourage buyers to leave a little room in their monthly budget after that first year in the home.

Final Thoughts

The mortgage world has a lot of terms that sound way more complicated than they actually are… and escrow is definitely one of them.

At the end of the day, escrow accounts are simply designed to help homeowners stay current on taxes and insurance while making monthly budgeting a little easier.

And as always, if you ever have questions about how escrow works, whether you need one, or what makes the most sense for your situation, I’m always happy to help.

Lynn Marie Oates
Mortgage Loan Officer NMLS #1495433
(248) 875-1029
[email protected]

I know firsthand how overwhelming securing a mortgage can feel — and that’s exactly why I’m here. With my experience and a heart for helping people, my goal is to guide you through every step with clarity, patience, and care.

I take a personalized, relationship-first approach, offering full support and clear communication so you never feel rushed or unsure. I take the time to understand your goals, explain your options, and help you put your strongest offer forward when it matters most.

Helping people feel confident, prepared, and excited about homeownership isn’t just part of my job — it’s what I truly love to do!