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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 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?
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.
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