If you are in the market for a home loan or a mortgage, it is important to understand mortgage escrow account rules.
Many lending institutions require their borrowers to maintain escrows on mortgages, and even those who don’t require it often encourage it.
This is because a mortgage escrow reduces the company’s chance of losing their investment in your home through fire or lapsed property taxes.
Many people, however, are unsure of what to expect from this type of account.
They wonder, “What is an escrow account? Why do I need one? How do they work?”
Below, you will find the answer to these and other questions about escrow accounts.
What is an Escrow Account and What Are Mortgage Escrow Account Rules?
An escrow account is an account where funds are deposited for the purpose of paying a bill or meeting an obligation. It is held by a third party, who is responsible for fulfilling the terms of the obligation.
In the case of a mortgage escrow, the funds are used to pay property taxes, fire insurance, and other types of homeowners insurance.
Escrow accounts are typically one of those checklist items on your list of “what do I need to buy a home?”
Why Should You Have an Escrow Account?
On some types of loans, escrow accounts are required by law as a condition of receiving the money. Other times, mortgage companies refuse to finance mortgages without an escrow.
Even if neither of these are the case, however, it is often in the best interest of a homeowner to keep an escrow account to save for annual expenses such as property taxes and homeowner’s insurance.
Property taxes can run into the thousands or tens of thousands of dollars, and insurance can cost as much as a thousand or more. Often, the entire payment will be due at once.
This is a huge burden for many people.
By spreading the payments out over the course of a year, escrow accounts ensure that the money will be there when it is needed and these payments will be made on time.
As a result, home owners can rest assured that they will not be faced with delinquent taxes or lapsed insurance.
How Does an Escrow Account Work?
As a general rule, the escrow account is created at the same time as the loan.
The mortgage company estimates your taxes and insurance costs, divides the amount by twelve, and adds the amount to your monthly mortgage payment.
Sometimes, they include a cushion to account for tax increases or missed payments.
However, according to mortgage escrow account rules this cushion cannot exceed more than 1/6th of the total amount due.
If either your taxes or insurance premiums go up, your escrow account payment will probably do the same.
How Much Does an Escrow Account Cost?
This depends on several factors. First, how much is your home worth? Both taxes and insurance are generally calculated based on the value of the home.
Therefore, those who own a more valuable home can expect to have much higher escrow payments than those who own smaller homes.
Second, what are the taxes in your area? This will be a percentage of the value of your home, and it will often go up when new roads are constructed or new schools are built.
Finally, does your mortgage company add a cushion to your escrow payments? This can amount to as much as two full month’s worth of payments over the course of a year, so it is important to be aware of it in advance.
As a general rule, however, you can expect your escrow account to add several hundred dollars a month onto your mortgage payment.
How Can I Be Sure That My Mortgage Escrow Account Rules Are Followed?
As long as your mortgage payments are not delinquent by more than thirty days, your lender is required by mortgage escrow account rules to make your escrow payments on time.
If they do not, they are responsible for paying all fees and penalties.
However, there are times when this does not occur, either through negligence or fraud. There are several things you can do to avoid having this happen to you.
First, pay your mortgage on time. If you are more than thirty days late, your mortgage company’s requirements to make your payments may be waived.
Second, pay close attention to your escrow statements. Lenders are obligated by law to list all deposits made and all payments disbursed.
Finally, make sure that your escrow account is being audited at least once a year. This can help you avoid the mistakes and fraud that often take place when escrow accounts are unmonitored.