Unless you’re paying cash for your home, the lender is likely to require that you have an escrow account to pay your taxes and insurance.
WHAT IS ESCROW?
Depending on what part of the country you’re in, the term escrow can have different meanings. In California for example, “close of escrow” essentially means that a real estate transaction has been completed and the sale is final.
A mortgage escrow isn’t the same as a real estate transaction escrow. Unlike a real estate transaction escrow which is used by the buyer and seller in the process of a home purchase, a mortgage escrow is between the homeowner and mortgage lender.
Generally, mortgage escrow accounts are used to collect pay property taxes and insurance payments on a home. Lenders prefer that you escrow to make sure your property is insured and the taxes are paid on time.
When closing on a home loan, homebuyers will be required to deposit a specified amount for real estate taxes and insurance premiums into an escrow account.
THE BENEFITS OF HAVING AN ESCROW ACCOUNT
An escrow account is beneficial to the mortgage lender because it brings reassurance about the wellbeing of its collateral, the borrower’s home.
With the mortgage lender paying the real estate property taxes on time, as well as keeping the insurance policy up to date, the lender doesn’t have to worry about a seizure on the property by tax authorities, nor do they need to fear any losses from property damage due inadequate insurance coverage.
Even if the lender doesn’t require an escrow account, homeowners may want to request one voluntarily as escrow accounts can be beneficial for borrowers.
Instead of managing due dates on your own, your mortgage lender will do it for you.
Escrow accounts make it easier to pay large property tax bills or homeowner insurance premiums by paying smaller amount each month with their monthly mortgage payment.
THE REAL ESTATE SETTLEMENT PROCEDURES ACT
The Real Estate Settlement Procedures Act (RESPA) protects borrowers by strictly controlling how a lenders handles escrow accounts.
RESPA requires that lenders conduct escrow analysis to ensure all lenders are handling borrowers’ escrow accounts in the proper manners.
RESPA allows lenders to maintain a cushion equal to 1/6th of the estimated total annual payments.
RESPA also requires lender to provide borrowers with an Initial Escrow Disclosure Statement with 45 days of closing, as well as an Annual Escrow Account Disclosure Statement at least once every 12 months. These annual statements are intended to provide information regarding the anticipated tax and insurance activity in the escrow account.
ARE ESCROW ACCOUNTS MANDATORY?
Depending on your lender and the type of loan program, you may be required to have an escrow account.
For example, a loan that is insured or guaranteed by the Federal Housing Administration (FHA) requires all borrowers to escrow their taxes and insurance.
For most conventional loans, if a borrower has at least 20% in equity, they may have the option of not escrowing.
Usually, in order to waive escrows on a conventional loan, the borrower will incur a small fee (and/or a slightly higher interest rate) to offset the risk to the lender for not escrowing.
Remember, the lender prefers borrowers to escrow to prevent a tax lien from being placed on the property in case taxes are neglected. Tax liens are one of the few types of liens that will supersede a mortgage lien.
MORTGAGE ESCROW ACCOUNTS & TODAY’S MORTGAGE RATES
When obtaining a mortgage, you’ll typically pay extra money into an escrow account every month, along with the payment for your home loan. A mortgage escrow account is easy way to manage property taxes and insurance premiums for your home.