As part of the home loan process, borrowers usually have to establish an escrow or impound account in which to deposit real estate taxes and insurance premiums. The purpose of such an account is to make sure that all real estate taxes and insurance costs will be paid in full and on time, protecting the lender from tax liens as well as uninsured losses.
Escrow accounts are confusing for many home buyers. Here are a few facts to help you better understand your escrow account:
What is an escrow account?
An escrow account is basically a savings account held by a neutral third party that is established when your mortgage is taken out. The money in the account covers estimated local and county real estate taxes, home insurance premiums and any special assessments.
How much money can my lender keep in my escrow account?
The Real Estate Settlement Procedures Act (RESPA) sets limits on the amount a lender can require you to put into your escrow account to that of one-sixth of the total amount of items paid from the account or approximately two months worth of payments. Any account assessments and adjustments are made on a yearly basis, with excess funds at the end of the year of $50 or more returned to the borrower.
How can I make sure my escrow account is operating properly?
The amount in your escrow account can vary throughout the year due to changes in your tax assessments and insurance premiums. If increases occur, the lender will typically cover any extra costs until it can adjust your monthly payment.
Once a year, you will get an escrow statement from your mortgage company for your home, showing how much money you paid that year in taxes and insurance premiums, as well as how much your new escrow payments are for the year ahead. It’s a good idea to review your escrow statement and try to figure out your charges is the smartest route. Mortgage companies have been known to mistakenly ask for too much money for an escrow account.
If you think you may be paying too much into your account, speak with your lender. If things don’t change, you can file a complaint with the U.S. Department of Housing and Urban Development (HUD). It’s important to continue to make your mortgage payment during this time. For more information, you may want to review the Department of Housing and Urban Development’s Web site.
Keep in mind when reviewing your statement that mortgage lenders can forget to pay your taxes on time, which can result in the payment of penalties and interest, which the bank will often debit from your escrow account to cover any extra charges. These fees should be repaid to you, as your lender’s late payment is not your fault.
Can I avoid an escrow account?
It is a lender’s decision whether or not to require an escrow account and many lenders do require such accounts as part of their loan’s terms, particularly government-insured loans such as VA or FHA loans.
If you have a conventional loan and do not pay private mortgage insurance – meaning your loan-to-value ratio is less than 80 percent – a lender may allow you to pay your own property taxes and home insurance premiums, but some lenders may raise your interest rate to cover any added risks.