Escrow Accounts

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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. 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.  Escrow accounts ensure that these items are paid in a timely fashion, which lowers the risk on most loans, which is why, in most cases, rates are slightly lower if you escrow.

WHAT 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.  But the lender will then collect the money from the homeowner through higher escrow account payments in the upcoming year.

 

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.

 

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 1/16 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.

What if my home is sold or I refinance?

Lenders have 21 working days (roughly 30 days total) from the date of receipt of a loan payoff to remit the funds in the escrow account plus any overages that were paid above the actual payoff amount. Lenders may at their discretion refund these funds sooner.