If you've taken out a mortgage loan, your lender probably set up a miscellaneous escrow account for it. If you run a small business, you might need to set up such an account for your clients. Escrow is often misunderstood, but it's an important part of certain financial transactions. It's a way to make sure certain bills and expenses get paid.
A miscellaneous escrow account is used -- by business customers, mortgage lenders, banks or other parties -- to make non-specific payments. That's the "miscellaneous" part. Such an account isn't created to pay just one type of bill. Instead, the people or financial institutions depositing money into the account can use it to pay a wide variety of bills.
Escrow accounts are often used in mortgages. When a mortgage lender opens an escrow account, it charges the homebuyer extra dollars with each monthly mortgage payment. These extra dollars go into into an escrow account. When property taxes, homeowners insurance or other bills come due, the lender dips into the escrow account to pay those costs for the homeowner.
Business owners might open miscellaneous escrow accounts for their regular customers. This lets customers -- who fund the accounts -- use escrow dollars to pay for goods and services. With an escrow arrangement, these customers don't need revolving lines of credit. For instance, an auto repair shop sets up an escrow account with its favorite supplier of parts. When the shop needs specific parts, the supplier simply dips into the repair shop's escrow account to cover the cost.
The main benefit of an escrow account is that it saves individuals or businesses the hassle of saving up for big bills or remembering to pay these bills on time. In the most common example, homeowners who enter into escrow arrangements with their lenders don't have to worry about paying their property taxes or homeowners insurance. Their lenders do that for them. The homeowner also doesn't need the financial discipline to save up for these large bills. That's taken care of automatically because his monthly mortgage payments includes payments to his escrow account.
Video of the Day
- Thinkstock/Comstock/Getty Images