Escrow Accounts 101: What Every Michigan Homebuyer Should Know

Buying a home in Michigan is exciting, but there’s a lot to learn along the way. Escrow isn’t usually one of the first things buyers think about, yet it plays an important role in the process. Whether you’re working with property taxes in Detroit or homeowners insurance near Grand Rapids, understanding escrow helps you budget, avoid surprises, and stay confident throughout the purchase.

In Michigan, escrow accounts are typically used to manage money for property taxes, homeowners insurance, and sometimes mortgage insurance. They act as a safeguard, making sure these bills are paid on time and relieving you of big lump-sum payments that could disrupt your finances.

 

What is an Escrow Account?

In simple terms, an escrow account is a holding account managed by your lender (or a neutral third party) that collects and disburses funds for key homeownership expenses. During the purchase process, it may hold your earnest money. Once you close, your lender may set up an ongoing escrow to collect parts of your property tax and homeowners insurance bills with every mortgage payment.

Instead of having to pay thousands of dollars out of pocket when property taxes come due each year (which in Michigan can vary by county), escrow stretches those costs over manageable monthly payments.

How Escrow Accounts Work When Buying a Home in Michigan
When you make an offer on a home in Michigan, your earnest money deposit is usually placed in an escrow account with a title company or attorney until closing. This protects both buyer and seller as inspections, funding, and paperwork conclude.

After closing, your lender may establish a recurring escrow account. Each month, it collects part of your property tax and insurance costs as part of your mortgage payment. When those bills come due, the lender pays them for you. If you ever have questions about your escrow balance or disbursements, your loan servicer can provide statements and documentation.

 

Why Do You Need an Escrow Account?

Escrow accounts offer predictability and protection, for both homebuyers and lenders. Imagine getting hit with a massive property tax bill or a lump-sum insurance payment right before the holidays. For many homeowners, that’s a financial headache waiting to happen. With an escrow account, those costs are spread out over the year, built right into your monthly mortgage payment. This ensures that when taxes and insurance are due, the money is already set aside, and your lender pays them on time. It’s a hands-off way to stay on top of major expenses, avoiding late fees, budgeting stress, and the risk of falling behind.

When Lenders Require Escrow
Lenders require escrow accounts primarily to protect their investment — your home — and ensure critical bills are paid on time. If property taxes aren’t paid, the government can place a lien on your property; if insurance premiums lapse, the property may be uninsured against major damage. Escrow helps prevent these outcomes by collecting planned amounts each month and keeping them available for scheduled payments. 

Here are common cases when lenders require escrow:

• Government-Backed Loans Always Require Escrow: loans insured or guaranteed by the Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or US Department of Agriculture (USDA) require escrow accounts for the life of the loan — regardless of down payment size
• Conventional Loans with Smaller Down Payments: for most conventional mortgages, lenders require escrow when the borrower puts less than 20% down. This standard protects lenders from uncovered tax or insurance obligations that could jeopardize the property’s value.

Because Michigan property tax schedules and insurance markets vary by county, lenders often prefer escrow to make sure payments are handled promptly and accurately.

What’s Paid Through Escrow?
Your escrow account covers the big, essential costs tied to homeownership, starting with property taxes and homeowners insurance. Since these bills can fluctuate from year to year, your lender may adjust your monthly mortgage payment to ensure your escrow balance stays on track. If you put down less than 20% on your home, you may also have private mortgage insurance (PMI), which is typically paid through escrow as well. Lenders estimate annual costs and divide them into monthly deposits. If bills change, your escrow amount may adjust at your annual escrow analysis.

What Happens if You Don’t Have an Escrow Account?
If you choose or qualify to pay taxes and insurance yourself, you’ll need to set aside funds and make payments on time. This gives more control and sometimes a lower monthly mortgage payment, but places the budgeting burden squarely on you. Missed or late payments can lead to penalties, liens, or lapses in insurance coverage.

 

Common Escrow Issues and How to Handle Them

Escrow accounts are designed to make homeownership easier, but they’re not entirely foolproof. Changes in property taxes or insurance rates can throw off your escrow balance, leading to unexpected shortages or payment adjustments. Understanding how your escrow account works and what to do when issues arise can help you stay ahead of surprises and keep your mortgage payments predictable.

Escrow Shortage
An escrow shortage happens when there isn’t enough money in your account to cover upcoming property tax or insurance payments. This usually occurs when taxes or insurance premiums increase, but your monthly mortgage payment hasn’t been adjusted to account for the higher costs. If this happens, your lender will typically give you two options: pay the shortage in full or have your mortgage payment adjusted to cover the difference over time. While spreading the cost out may seem easier, it will raise your monthly payment, so it’s worth weighing both choices before deciding how to handle it.

Escrow Analysis
Every year, your lender reviews your escrow account in a process called an escrow analysis. This review compares the amount collected versus what was actually needed to cover your property taxes and insurance. If there’s a shortage, your lender may adjust your monthly mortgage payment to make up the difference. On the flip side, if there’s a surplus, you could receive a refund or have the extra amount applied to future payments. Keeping an eye on your annual escrow analysis can help you anticipate changes and avoid surprises.

Can You Remove Escrow from Your Mortgage?
Yes, but typically only on Conventional Loans where you’ve built enough equity (usually 20%+) and meet lender requirements. Loans like FHA and most VA do not allow escrow removal without refinancing.

 

Why You Can Trust Treadstone Funding on Escrow and Home Buying

Choosing the right lender and understanding things like escrow can make a big difference in your home buying experience, especially in Michigan where local tax schedules and insurance markets vary. At Treadstone Funding, we help Michigan homebuyers navigate local market nuances, understand how escrow affects your monthly payments, and plan ahead for property taxes, insurance, and long-term budgeting so our buyers can make confident decisions without jargon or pressure.

Our team combines mortgage expertise with a deep understanding of Michigan communities, from Grand Rapids to Lansing and beyond, so you’re not just buying a home, you’re making a smart financial move for your future.

 

FAQs

What is an escrow account and how does it work?
An escrow account is a financial tool that holds part of your mortgage payment to pay property taxes, homeowners insurance, and sometimes mortgage insurance on your behalf. It ensures timely payments and spreads large bills into monthly amounts.

Who owns the money in an escrow account?
The money in an escrow account technically belongs to the homeowner, but it is held and managed by a third party (usually the lender or a trusted escrow company). The funds are kept in the account to cover specific expenses like property taxes and insurance. The homeowner can’t access the money unless it’s used for those designated purposes.

Is an escrow account a good idea?
For many Michigan homebuyers, yes. It simplifies budgeting and protects against missed payments. However, financially disciplined buyers with strong equity may choose to waive escrow where allowed.

What is the reason for an escrow account?
The main reason for an escrow account is to ensure that important expenses like property taxes, homeowners insurance, and mortgage insurance are paid on time to reduce the risk for both the borrower and lender.