WHAT
IS A MORTGAGE ESCROW ACCOUNT?
Mortgage escrow
accounts are special accounts set up by the lender in which money is held to pay for property
taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other escrow items.
Escrow accounts ensure that these items are paid in a timely fashion. They are a guarantee
that there is always enough money to pay these bills when they are due so that the homeowner
avoids the risk of lapsed insurance coverage or delinquent taxes.
WHAT DO MORTGAGE ESCROW ACCOUNTS DO FOR HOMEBUYERS?
- GUARANTEE THAT BILLS ARE PAID
ON TIME. Homeowners do not have to worry about coming up with several large, lump sum payments,
each with different due dates, throughout the year.
- UNEXPECTED INCREASES ARE TAKEN
CARE OF. It is the responsibility of the lender to allow for possible increases in tax or
insurance premiums.
- LENDERS TYPICALLY COVER SHORTAGES
WHEN TAX OR INSURANCE PAYMENTS INCREASE. It is very common for lenders to pay taxes and
insurance premiums when they are due even though all the money for these bills has not yet
been collected from the homeowner.
- MORTGAGES HAVE LOWER RATES
AND DOWN PAYMENTS BECAUSE OF ESCROWS. Escrows protect the interest of investors of home
mortgage loans by making them more attractive and secure as investments.
- LOCAL GOVERNMENTS SAVE MONEY.
Escrow accounts also benefit local governments by providing a more efficient, less expensive
means of tax collection.
HOW DOES THE LENDER COME UP WITH MY PAYMENT?
The law is very specific in setting
limits on the amount that a lender may collect. The lender may require a monthly payment of
1/12 of the total amount of estimated taxes, insurance premiums and other charges reasonably
anticipated to be paid. Plus, the lender may collect an additional balance of not more than
1/6 of the estimated annual payments. If the lender determines there will be or is a deficiency
in the escrow account, the law permits the lender to require additional monthly deposits to
avoid or eliminate the deficiency.
WHO SHOULD
YOU TALK TO ABOUT MORTGAGE ESCROWS?
Escrowing as practiced by the
nation's lenders protects both the borrower and the lender. Borrowers who have questions or
concerns about their escrow accounts should talk to their lenders immediately. Consumers who
know the purpose of escrows and are aware of the benefits they provide are the best insurance
against misunderstandings between borrowers and lenders or misleading information from any
source. |
