MORTGAGE ESCROW ACCOUNTS
Mortgage escrow accounts have been in the news lately and
seem to be greatly misunderstood by many consumers. The
original idea behind mortgage escrow accounts was to protect
the interests of homeowners and have been serving that purpose
for more than 50 years.
The History of Escrows
Mortgage escrow accounts came into being more than 50 years
ago. In the 1930's, many Americans were losing their homes
in foreclosures because of late tax payments. To help ease
the burden on homeowners who had to come up with large,
lump sum payments at tax time, lenders agreed to take on
the responsibility by collecting smaller monthly sums from
homeowners along with their mortgage payment. In 1934, the
government mandated that lenders manage escrows on all FHA
insured mortgages. This then became the standard practice
for all mortgages.
Why Mortgage Escrows?
Mortgage escrow accounts ensure that homeowners' property
taxes, fire and hazard insurance premiums, mortgage insurance
premiums and other escrow items are paid in a timely fashion.
They are a guarantee that there is always enough money to
pay these bills when they are due so that the homeowner
avoids the risk of lapsed insurance coverage or delinquent
taxes.
Who's Protecting The Homeowner?
Escrows are governed by the Real Estate Settlement Procedures
Act of 1974 (RESPA), administered by the U.S. Department
of Housing and Urban Development (HUD). Lenders must manage
their escrow accounts in compliance with this federal law
and with the interpretations set out by HUD.
In addition, the 1990 Housing Bill requires lenders to issue
itemized statements of escrow accounts to borrowers on an
annual basis. While many lenders are already providing homeowners
with regular statements of their escrow accounts, the new
law should ensure that every lender follows this practice.
Who Should You Talk To?
Escrows, as practiced by the nation's lenders, protects
both the borrower and the lender. Borrowers who have questions
or concerns about their escrow accounts should talk to their
lenders immediately. Consumers who know the purpose of escrows
and are aware of the benefits they provide, are the best
insurance against misunderstandings between borrowers and
lenders or misleading information from any source.
What Escrows Do For Home Buyers {back
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Guarantee that bills are paid on time.
The most obvious advantage of escrows is they automatically
budget the borrower's tax and insurance responsibilities
over the course of a year. Homeowners do not have to worry
about coming up with several large, lump sum payments, each
with different due dates, throughout the year. If there
is a fire in the home, or the basement floods causing damage,
the homeowner is assured that the home is protected by up-to-date
insurance.
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Unexpected
increases are taken care of.
Because of escrows, homeowners do not need to worry about
calculating unexpected increases in their taxes or insurance
premiums. It is the responsibility of the lender to allow
for possible increases in these payments. When there are
not enough funds in a mortgage escrow account to meet increased
tax or insurance payments, the lender typically covers the
bill without charging interest to the borrower. It is very
common for lenders to pay taxes and insurance premiums when
they are due even though all the money for these bills has
not yet been collected from the homeowner. It is estimated
that in 1989 alone, lenders advanced more than $600 million
to homeowners who then avoided the penalties and risks of
not paying their taxes and insurance on time.
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Mortgages
have lower rates and down payments because of escrows.
Escrows protect the interests of investors in home mortgage
loans. By making home mortgages more attractive and secure
as investments, escrowing has led to a healthier mortgage
market. As a result, loans with better terms and lower down
payments are available to home buyers.
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Local
governments save money.
Escrow accounts also benefit local governments by providing
a more efficient, less expensive means of tax collection.
Rather than working with millions of homeowners, municipalities
need only collect from a few hundred lenders.
How Does The Lender Come Up With My Payment?
The law is very specific in setting limits on the amount the
lender may collect. The lender may require a monthly payment
of 1/12 of the total amount of estimated taxes, insurance
premiums and other charges reasonably anticipated to be paid.
Plus, the lender may collect an additional balance of not
more than 1/6 of the estimated annual payments. If the lender
determines there will be or is a deficiency in the escrow
accounts, the law permits the lender to require additional
monthly deposits to avoid or eliminate the deficiency.
What Happens When My Loan Is Transferred?
When the servicing of your loan transferred to another lender,
the new lender takes on the responsibility of managing your
escrow account. At that time, the new lender may examine your
escrow account to make sure the funds being collected are
sufficient to cover all payments that are to be made. If the
new lender feels that the amount collected must be adjusted,
you will be notified of the change in your monthly payment.
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