Dec

There’s an Escrow for That

An escrow account is established to pay the on-going expenses of home insurance and property taxes. The escrow account will be funded at closing, and 1/12 of the payments for all escrowed items will be added to your mortgage payment. Lenders will require an escrow account for all loans if your loan to value is over 80%.

Real Estate Settlement Procedures Act (RESPA) mandates that lenders may only hold a maximum cushion of two months of the amount to pay for the escrowed fees. Lenders must also, do a yearly audit of the escrow, by looking at the cost for property taxes, and homeowner’s insurance, to ensure that they only have the two month cushion. If your account has more than two months, then you’ll get a refund check from the lender; however, if if it under you’ll get a letter from the lender requesting that you make up the difference. Typically, they will give you a couple of months to pay the amount owed, or they will add it to your monthly bill over the next 12 months. This can become a problem for new construction, since the property is initially assessed as vacant land. The property won’t get assessed with a house until sometime after the house is finished construction. The tax on vacant land is very cheap, so when it gets assessed with a house there will be a huge jump in property taxes causing your escrow account to be underfunded.

The benefits of an escrow account:

Known Expense: You do not need to come up with a large amount of money at one or two times a year to pay taxes and insurance. The cost is split into monthly payments to cover the obligations when due.
No Worries: Less bills to track and pay is always nice. Your loan servicer will make the payments for your property taxes and home insurance on your behalf and on time.

For more information visit RESPA and Escrow Account FAQ.