Mortgage Escrow Account – Introduction To Home Mortgage Escrow Accounts

30.04.2013

If you are thinking on the lines of purchasing a house or already got a mortgage, you would have certainly come across the term “mortgage escrow account” but perhaps didn’t really understand its implications and how does it work! A mortgage escrow account is designed to facilitate payment towards homeowner’s insurance and property taxes.

What is a Mortgage Escrow Account?

 It is not unusual for home buyers, especially those buying one for the first time, to overlook two expenses that add to the cost of their house, namely the homeowners’ insurance and property taxes. With your home mortgage escrow account you can make these payments every month together with your mortgage amount. As they fall due for payment, the lender makes payment for these from your accrued money.

Is a Home Mortgage Escrow Account Necessary?

You really don’t have much of choice in this regard. In fact, if you made down payment of less than twenty percent, most lenders will make it necessary for you to have such account.

When an escrow account essentially becomes a part of your mortgage, you can be sure that your homeowners; insurance and property taxes are paid. So, having such account safeguards you against any hefty penalties for non-payment of property taxes on time and the risk suffering loss of your investment in home due any unfortunate incident like fire or natural disaster.

Amount you need to deposit in your escrow account

When you open an escrow account for home mortgage, it should have an amount equal to the premium of your home insurance and taxes payable for one year. However, the amount may change, depending on variations of taxes and premiums payable, in which case your lender can ask you to pay additional amount or pay back to your account any surplus amount, should there be any.

You may be wondering what if the lender charges more. You need not worry about that as laws preventing him from doing that are already in place. Leave aside charging in excess, the lender can’t even use your funds for any other purpose except those already mentioned. Fortunately we have section 10 of the Real Estate Settlement Procedures Act (RESPA0 that debars lenders from asking you to deposit more than the minimum required amount in your escrow account for making payment towards insurance and taxes.

How do I know if my Escrow Money is being used properly?

At closing the lender provides you with Initial Escrow Deposit (EID), giving an estimate of what may be deposited into or withdrawn from your account during the period for which you’ll be paying mortgage. Further, it is obligatory by law for lenders to keep you informed of your escrow account through Annual Escrow Disclosure Statement (AED.)

You also have the right to ask you lender for proof of having deposited payments on your behalf to appropriate authorities. If you fail to get copies of receipts within thirty days of having made payments, you can check up with your insurance company or the tax collecting authorities and seek confirmation of having deposited taxes to your account.

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