INTRODUCTION
Like millions of homeowners, your
monthly mortgage payments cover
principal and interest and, probably,
something called an escrow account. But,
like many people, you may not know why
you pay into an escrow account each
month, how the amount is determined, or
how your lender disburses funds from the
account.
WHAT IS AN ESCROW ACCOUNT?
An escrow account is a fund your lender
establishes to pay property taxes and
hazard insurance as they become due on
your home during the year. In this way,
the lender uses the escrow account to
guard its investment in your home. For
example, if you did not pay your property
taxes, your municipality could sell your
home at a foreclosure sale. Similarly, if
you neglected to pay the hazard insurance
premium, a fire or flood that destroyed
your home would also destroy the
lender’s security for the loan.
MUST I HAVE AN ESCROW
ACCOUNT?
Most mortgage loans require escrow
accounts, but not all do. In some cases, if
your mortgage contract does not
specifically require an escrow account,
you may be able to negotiate with the
lender for the right to pay your own taxes
and insurance. This ability can help you
avoid having your money tied up until it
is needed. However, if you have a
mortgage insured or guaranteed by the
Department of Housing and Urban
Development or certain other federal
agencies it may not be possible to
negotiate the right to make your own tax
and insurance payments, and these
payments will have to be held in an
escrow account until the lender disburses
them on your behalf.
HOW MUCH SHOULD THE
LENDER CHARGE?
The goal of the escrow account is to have
enough money to pay taxes and insurance
when they become due. To achieve this,
the lender adds one-twelfth of the tax and
insurance amount to your mortgage
payment each month. For example, if
your taxes and insurance are $1200 per
year, the lender would collect $1200 in
twelve installments of $100 per month.
To cover possible tax or insurance
increases, the federal Real Estate
Settlement Procedures Act (RESPA)
1
permits the lender to add to the yearly
amount two months of extra payments
prorated monthly. So, the lender would
collect an additional $200 divided by 12,
or $16.67 per month, for a total escrow
payment of $116.67 per month.
1
12 U.S.C. § 2601 et seq. (2010).
HOME MORTGAGE ESCROW ACCOUNTS
prepared by
MOUNTAIN HOME AFB
GUNFIGHTER LEGAL OFFICE