Why 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 they 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 the 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?
Escrowing is 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 require 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?
Escrowing 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 Homebuyers
1.
Guarantee that bills are paid on time.
The
most obvious advantage of escrows 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.
2.
Unexpected increases are taken care of.
Because
of escrows, 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.
3.
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 homebuyers.
4.
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.
