What You Need to Know About Escrow Accounts

Whether you’re a longtime homeowner or a newbie, don’t forget to monitor your escrow account if your lender required one when you took out your mortgage. You want to avoid any pitfalls since it’s still your money (and your home!).

Here’s a rundown of why you should always stay on top of things when it comes to escrow accounts.

What’s It All About?

An escrow account is usually established for you by your lender when you take out a mortgage with them. It’s used to collect and hold funds that will pay your property taxes and homeowner’s insurance premiums when they are due, usually once or twice a year. Your lender will make these payments on your behalf.

Basically, part of your monthly mortgage payment includes an amount for property taxes and insurance in addition to what you owe for principal and interest. That specific amount for property taxes and insurance is placed by your lender into an escrow account.

Tell Me Why

“Protecting the lender” is one of the main reasons for an escrow account. Your house is their collateral and they don’t want to lose out if a fire destroys it or you forget to pay your property taxes! In fact, having an escrow ensures that your lender will get the first claim on your house if you default, ahead of the local government.

Not everybody has an escrow account. It’s up to the lender whether a borrower must maintain an escrow account or not.

However, certain government loans such as FHA (Federal Home Administration) and VA (Veterans Administration) loans may require them. Or, a lender may require an escrow account as a condition of the loan since it protects them by ensuring your taxes and insurance will be paid.

Typically, lenders will give you the option to waive the escrow account if you put down more than 20% as a down payment. You also may be able to opt out of an escrow account but your lender may charge you a flat fee or it will add 0.25% to 0.5% to the loan amount.

What Are the Benefits?

Even though it protects the lender, having an escrow account also can be beneficial to the borrower:

• No Lump Sum Payments. Since you’re making smaller monthly payments, the escrow forces you to manage your money.
• You’re Protected Too: Less worry on your end when you know your insurance and taxes are paid! You protect your investment in your home and meet your lender’s requirements.

What’s The Hitch?

There are some negatives to having an escrow account and here’s some items to keep in mind:

• You don’t have access to your own money. It’s locked up in escrow long before your tax or insurance payments are due.
• You usually don’t earn any interest on the money in escrow. This can vary by state.
• You may miss out on some tax advantages. You can’t time your property tax payments to make this happen.
• Your lender can make mistakes and not pay your taxes or insurance on time. Even though they are responsible, you’re the one who will have to follow up and make sure it’s corrected.

Manage Your Account

Your monthly mortgage account statement should list your “Escrow Balance” and the amount that is applied to escrow. Your lender also should send you an annual statement showing the prior year’s activity — the amounts collected, placed in escrow, and payments made on your behalf.

So it’s important to always check your statement carefully.

Here are some rules to live by:

• Make sure everything adds up. Look at your escrow statement and compare it to your property tax and insurance bills.
• Only basic homeowner’s insurance is paid out of your escrow. Anything additional, like expensive artwork, requires a direct premium payment by you.
• Double check how much is in your escrow account. Your lender can have a “cushion” or extra money but only up to two months’ worth of payments, according to HUD (Housing and Urban Development) . Check your loan documents to figure out what is the appropriate cushion. If nothing is mentioned than the “two month” limits apply, unless state law provides for a lower amount.
• Make sure your lender refunds you any available balance. This should be done when you sell your house or refinance your mortgage.
• Reimburse you lender if your account is negative.  It’s probably due to a recent increase in your taxes or insurance.  

When It’s Amiss

If a lender fails to make an insurance payment, contact them immediately.

Some lenders list a special address and/or number for insurance and tax bills. Keep checking with the insurance company to make certain the bill is paid. You may wish to pay the insurance company directly to avoid cancellation of your policy and then seek a refund from your lender.

If your lender missed an insurance payment, it should pay any penalties if you are current in your mortgage payments. And, you can sue your lender if your insurance is canceled due to these late payments. You also can always file a complaint with HUD if the lender refuses to pay the fee.

Always contact your lender in writing if you have a problem and keep copies for your records. Your lender must acknowledge your letter within 20 days and has 60 days to fix your problem. You can always file a complaint with HUD if you’re not satisfied or consult with an attorney to bring a private lawsuit.

As you can see, it’s important to monitor your escrow account carefully. Having an escrow account may make life easier for you but it’s also your responsibility to make sure nothing is amiss.