Buzz
Escrow accounts serve various purposes, with the most prevalent being the requirement by mortgage lenders during home purchases. Deposits are made monthly into this account, used primarily for state property taxes and homeowner's insurance premiums. Unlike standard bank accounts, an escrow account involves three parties: the depositor (homeowner), the escrow agent (usually the lender), and the beneficiary (the state and insurance company).
Procedures
Setting Up Your Escrow Account
Determine if your lender mandates an escrow account. Even if not obligatory, consider opting for one.
- An escrow account enables monthly payments towards property tax and homeowner's insurance premiums, usually paid annually in hefty sums.
- Monthly payments ease budgeting, whereas without an escrow account, saving for these substantial annual expenses becomes necessary.
- Escrow accounts are typically compulsory for federally guaranteed loans (e.g., VA or FHA loans) or conventional mortgages exceeding 80 percent of the property's value.
Collect necessary information. Your lender may request details regarding your homeowner's insurance and property tax.
- Failure to provide accurate information might result in receiving a bill indicating non-payment by your lender, complicating withdrawal from the escrow account.
- Based on your provided details, your lender will determine monthly deposit amounts required to cover insurance premiums and property tax.
- Verify your lender's calculations against the total annual payments owed for tax and insurance.
- Some premiums cover multiple years, requiring you to divide the cost by the coverage period for annual calculation.
Inform relevant parties. Ensure bills for homeowner's insurance and property tax, paid by your mortgage lender as the escrow agent, are directed appropriately and not to you.
- Despite lender payments, bills remain your responsibility. Ensure correct amounts are paid punctually.
Depositing Funds
Determine the minimum balance. Both your lender and the bank typically mandate an escrow account to maintain a minimum balance at all times.
- Federal regulations limit the minimum amount your lender can demand in the escrow account.
- Usually, this balance equals approximately two monthly payments, serving as a reserve for potential tax or premium increases.
Set up monthly deposits. Monthly deposits should roughly total one-twelfth of your state property taxes and annual homeowner's insurance premium.
- You'll usually make a single payment to your mortgage lender each month, part of which covers principal and interest, while the rest goes into the escrow account for taxes and insurance.
- Failure to maintain escrow deposits may lead to lender penalties and potential foreclosure.
- Unpaid property taxes could result in a state tax lien on your property.
- Non-payment of homeowner's insurance, if required by your lender, may lead to foreclosure. Your lender might purchase insurance and add premiums to your loan balance, often at higher costs and with fewer benefits compared to self-purchased policies.
Maintain regular account checks. Stay updated on your account status by monitoring balances and deposits.
- You can typically access online platforms between annual statements to track transactions in your escrow account.
Assessing Your Annual Statement
Receive your yearly account statement. Federal law mandates lenders to send an annual statement detailing transactions in your escrow account.
- The statement typically includes all deposits and payments, along with projections for the upcoming year.
- Compare it with prior statements to ensure consistency.
Validate figures from state and insurer. Double-check statements received for property taxes or insurance premiums against your escrow account statement.
- Confirm due dates, particularly if changes have been noted by the lender, as they impact monthly deposits.
- For increased premiums, inquire with the insurer for reasons, considering a switch for cost savings if no claims have been made.
- For higher property taxes, verify with the local taxing authority to ensure accurate assessment.
Address any deficits. In case of insufficient funds in your escrow account, consider larger monthly payments or a lump-sum deposit to cover the shortage.
- Escrow payments may rise due to tax or premium rate hikes, even after covering the shortage with a deposit.
Pointers
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If your lender fails to make timely insurance or tax payments from your escrow account, you may have grounds to initiate legal action. Upon receiving a penalty-incurred bill, forward it to your lender and seek legal advice to explore available options.
