Understanding escrow accounts
If you have owned a home with a mortgage, chances are you or your lender collects funds to be placed in an escrow account. But have you ever taken the time to really understand your escrow account and what your consumer rights are?
The definition of escrow generally refers to money held by a third party on behalf of transacting parties. Specifically as it relates to mortgages, the mortgage company establishes an escrow account to pay property tax and possibly insurance during the term of the mortgage in order to protect its interest in the property.
This time of year those of us with mortgages on our properties are receiving statements from their lenders itemizing the interest paid on the mortgage and the escrow balance in our accounts. An Escrow Account Disclosure Statement is required to be provided to borrowers at least once a year.
Mortgage lenders decide if an escrow account is required as one of the terms of granting the mortgage. Some lenders collect escrow for both property taxes and property insurance, and others only collect for property taxes. Escrow accounts are strictly an arrangement between the lender and the borrower.
If you have an objection to a lender establishing an escrow account for your new mortgage, it is possible to shop around for a lender who does not require one. However, unless you have a personal relationship with a lender and a sterling past history, this may be impossible to find. After a period of years demonstrating an excellent payment record, you could request the lender to suspend collecting monthly escrow payments.
The federal government does not require escrow accounts and has no input as to lenders' decisions, however, they do regulate the amount of escrow than can be held as a cushion in the event a homeowner misses a monthly payment. Under federal law, this amount is two months or one-sixth of the annual escrow required.
The monthly escrow calculation is pretty straightforward. The annual property tax and/or insurance premium expenses are divided by 12 and this amount is added to the monthly mortgage payment. These deductions are adjusted annually based on changes in property tax and insurance premiums.
Shortages are generally divided by 12 and added to the monthly mortgage payment to keep the account in balance. If there is an overage of $50 or more in an escrow account, lenders are required to send a refund check for this amount. Overages under $50 are applied to the monthly payment.
Most homeowners, especially first time buyers, welcome lenders handling this aspect of their responsibility. Escrow accounts take the obligation and burden of saving large amounts of money off of the homeowner and put it on the lender, in addition to eliminating the stress of keeping track of property tax and insurance premium due dates.
If a lender for whatever reason does not pay your property tax and insurance premium on time, he/she is fully liable for any penalties assessed. It's also important to verify your lender is paying property tax bills in accordance with the discounts offered by Manatee County.
Whether you have owned a home for years or are new to the market, understanding escrow accounts is vital to your household budget's bottom line. You may not have much of a choice when it comes to escrow accounts, but it's essential to understand the process and knowledge is power.