Skip to content 
Escrow is an essential part of the mortgage process that helps homeowners and lenders ensure that important expenses, like property taxes and insurance, are paid on time. Through an escrow account, these costs are managed and paid automatically, easing the homeowner’s burden.
At Sire Finance, we explain escrow’s role in mortgages so you can make informed decisions about managing your home financing, whether you’re in the UAE or internationally.
How Does Escrow Work?
The lender establishes an escrow account to collect and hold funds for taxes, insurance, and other related costs, which are typically paid annually. Your monthly mortgage payment will include an escrow portion that goes into this account.
The lender then uses the funds from the escrow account to pay these costs on your behalf when they come due. This system ensures that payments are made on time, reducing the risk of penalties or lapses in coverage for insurance and taxes.
The amount you contribute to the escrow account each month is calculated based on the estimated annual costs of property taxes and insurance. The lender will review the balance in the escrow account periodically and may adjust the amount you contribute to ensure that there are enough funds to cover the expenses.
This process works similarly to a savings plan, where the borrower makes small monthly payments that accumulate over time to cover the large annual payments for taxes and insurance.
What are the Advantages of an Escrow Account?
One of the main advantages of having an escrow account is the convenience of automatic payments for property taxes and insurance. Homeowners don’t have to worry about saving up for these lump-sum payments yearly. Instead, the payments are handled automatically, giving you one less thing to manage.
Additionally, escrow accounts help ensure that taxes and insurance premiums are paid on time, preventing late fees, penalties, and potential lapses in insurance coverage. Having an escrow account gives both the homeowner and lender peace of mind, knowing that these essential financial obligations are being handled responsibly.
The security and simplicity of escrow accounts allow homeowners to budget more effectively. With escrow, the significant, unpredictable costs of insurance and taxes are spread out over time, making it easier to manage overall expenses. For many homeowners, this reduces financial stress and ensures that essential payments are never missed.
What are the Disadvantages of an Escrow Account?
While escrow accounts offer convenience, they also have some drawbacks. One potential downside is that the amount you pay into escrow can fluctuate. If property taxes or insurance premiums rise, your monthly escrow contribution may increase, raising your overall mortgage payment.
This fluctuation is significant to consider when budgeting for your monthly mortgage payments.
Some homeowners prefer directly managing their payments, especially if they can handle taxes and insurance themselves. They may also want more control over when payments are made. With an escrow account, the lender manages these payments, which removes that control.
Another disadvantage is that some lenders may charge fees for managing escrow accounts. These fees can add up over time, increasing the overall cost of your mortgage. While some lenders waive these fees, they are not universally offered.
When Do You Need an Escrow Account?
Escrow accounts are typically required for borrowers who make less than a 20% down payment on their mortgage. Lenders often require them to protect their investments by ensuring that essential expenses, such as taxes and insurance, are paid on time.
If a borrower has less equity in the home, the lender wants to ensure that these essential costs are appropriately handled.
However, depending on the lender’s policies, some homeowners in the UAE may choose to waive the escrow requirement if they have enough equity in their home. For instance, many financial institutions in the UAE allow borrowers to manage property tax and insurance payments independently if they have a strong payment history or if they put down a larger down payment.
Additionally, some mortgage programs or loan types may not require an escrow account, especially if you’re able to demonstrate financial stability and the ability to manage these payments independently.
Types of Escrow Accounts
Escrow accounts can vary depending on the borrower’s and lender’s specific needs. Generally, there are two types of escrow accounts used in mortgages: those for homebuyers and those for homeowners.
Homebuyers escrow account
Homebuyers typically use an escrow account during the mortgage process to ensure that all associated costs, like property taxes and insurance, are paid when due. The lender manages the escrow account, and the homeowner contributes to it as part of their monthly mortgage payment.
This type of escrow is helpful because it spreads out the cost of property taxes and insurance, making it easier for new homeowners to manage these responsibilities. Many lenders require this type of escrow to protect their investment, ensuring that taxes and insurance premiums are paid in full and on time.
Homeowners escrow account
Homeowners’ escrow accounts serve the same function, ensuring that taxes and insurance are paid, but they are established after the home purchase is complete. Homeowners with an existing mortgage may have an escrow account that is replenished with each monthly payment.
This type of escrow account helps prevent missed payments on essential home expenses.
Homeowners in the UAE, especially those with significant properties or multiple properties, may find it easier to manage escrow accounts to cover taxes and insurance payments, ensuring that there are no gaps in coverage or unpaid fees.
Homeowners can typically review and adjust their escrow account during refinancing if their taxes or insurance premiums change or if they choose to modify their monthly payment terms.
Who Manages the Escrow Account?
The mortgage lender typically manages escrow accounts or a third-party servicer. The lender is responsible for ensuring that the funds in the escrow account are distributed to the appropriate agencies when it comes time to pay property taxes, insurance premiums, or other related costs.
It’s important to remember that the lender is also responsible for ensuring the accuracy and timely payment of these payments.
In the UAE, escrow accounts may also be managed by third-party escrow companies, depending on the financial institution. These companies are responsible for ensuring that funds are allocated correctly and on time, especially in complex property transactions involving higher-value homes.
Do All Mortgages Require Escrow?
Not all mortgages require an escrow account. If you put down more than 20% when purchasing a home, some lenders may allow you to waive the escrow account requirement. However, even if you are not required to have one, you can choose to establish an escrow account voluntarily if you prefer the convenience of having taxes and insurance managed for you.
Escrow accounts are common with FHA and VA loans, but they are typically not mandatory for conventional loans with a down payment greater than 20%.
In the UAE, where many banks and financial institutions offer mortgages with varying terms, you can negotiate the inclusion or removal of escrow accounts depending on your financial profile and the value of your down payment.
Understanding Escrow on Your Mortgage
Escrow accounts play a vital role in the mortgage process by ensuring that property taxes and insurance payments are made on time, providing both convenience and peace of mind. While they have advantages and disadvantages, having an escrow account can help homeowners stay on top of critical financial obligations.
In the UAE, where property taxes and insurance can be more manageable than in other parts of the world, an escrow account offers the same benefits of peace of mind and predictable expenses. Globally, this system is in place to help homeowners manage the costs of owning a home, regardless of location.
At Sire Finance, we’re here to help you understand escrow and navigate your mortgage options, ensuring the best fit for your financial situation—whether you’re in the UAE or elsewhere.
