What You Need to Know About Escrow Accounts

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 you set up 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 when you take out a mortgage with us. 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 loan servicer 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 loan servicer 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!

Not everybody has an escrow account, but many people do.

Certain government loans such as FHA and VA loans typically require them. Many lenders require an escrow account since it protects them by ensuring your taxes and insurance will be paid.

In some cases you are given the option to waive the escrow account. Each lender may have different requirements to waive the account. There could be requirements such as a down payment equal to or greater than 20% down. Or, you also may be able to opt out of an escrow account by paying a fee. Often times this is a flat amount or a percentage of your loan amount. You can always ask me or the loan officer you are working with if you are able to waive the escrow account.

What Are the Benefits?

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

• No Lump Sum Payments. Since you’re making smaller monthly payments, the escrow account forces you to manage your money. I always like to think of it like a forced savings account or a budget system so that you never have to worry about missing those payments.
• 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. If your homeowner’s insurance lapses and you aren’t covered, damages can be costly!

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 loan servicer 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 each month. Your loan servicer 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. A new escrow analysis is done every year to ensure that enough is being collected in escrow each month to cover taxes and insurance.

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 may require a direct premium payment by you. You can check with your homeowner’s insurance agent.
• Double check how much is in your escrow account. Your loan servicer can have a “cushion” or extra money but only up to two months’ worth of payments, according to HUD. 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 loan servicer refunds you any available balance. This should happen when you sell your house or refinance your mortgage.
• Reimburse you loan servicer if your account is negative.  It’s probably due to a recent increase in your taxes or insurance.  

When It’s Amiss

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

Some loan servicers 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 loan servicer.

Always contact your loan servicer in writing if you have a problem and keep copies for your records.

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.