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 they have been
serving that purpose for more than 50 years.
The History of Escrow's
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
escrow's on all FHA insured mortgages. This then became
the standard practice for all mortgages.
Why Mortgage Escrow's?
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?
Escrow's 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 recently signed into
law by the President, 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?
Escrow's 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 escrow's
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 Escrow's Do For Home Buyers
- Guarantee that
bills are paid on time.
The most obvious advantage of escrow's is that 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 ever a fire in the home, or if the
basement floods causing damage, the homeowner is
assured that the home is protected by up-to-date
insurance.
- Unexpected increases are taken care of
Because of escrow's, homeowners also 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.
Even 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.
- Mortgages have
lower rates and down payments because of escrow's.
Escrow's 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.
- 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
that 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 that 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.