Escrow Accounts: What’s the Deal?

If you have a home mortgage escrow account, you pay one-twelfth of your annual property taxes and home insurance costs as part of your monthly mortgage payment. You likely find it so handy, you don’t even think about what you’re paying into this de facto savings plan. But if you remain ignorant of your rights and responsibilities, you could lose money, add extra fees to your loan, or end up going mano a mano with your insurer or local government.

Escrow accounts: lenders love them; you might not

As handy as they are, you’ll find some significant hitches:

  • You lock up your money before your tax and insurance payments are due, since your lender is taking the money out each month, often long before the tax payment is actually due.
  • Your lender usually doesn’t have to pay you interest on your escrow account—it varies by state.
  • Your lender may screw up paying taxes or insurance, and even though it has to fix mistakes, you have to make the time and effort to follow up.
  • There may be tax advantages to timing your property tax expenses—but you can’t do that if you’re paying a flat fee in escrow each month.

But your lender may insist on an escrow account because it:

  • Helps guarantee your insurance and taxes will be paid.
  • Ensures your lender will get the first claim on your house if you default, ahead of the local government.

In fact, your lender may do you the honor of charging you a flat fee for opting out of an escrow account, or it will add 0.25% to 0.5% to the loan amount if you decline to use an escrow account.

How to manage your escrow account

Your lender has to give you an annual escrow account statement and refund any available balance when you sell your house or refinance your mortgage. Check your escrow account statement carefully:

  • Make sure everything adds up. “If I have my escrow statement, my property tax bill, and my homeowner insurance declaration page, and everything matches up, then I’m fine,” says Debbie Siegel, president of Westchester Mortgage in Newton, Mass.
  • Check the size of the escrow account. Lenders are allowed to keep a reserve of no more than two months in payments in most states, and in some situations it’s even less. Your REALTOR® or lawyer can give you the skinny in your case.
  • Contact your lender in writing if you find a problem in your escrow account. If your lender missed an insurance payment, it should pay any late fees as long as your mortgage payments are current, according to the U.S. Department of Housing and Urban Development. If your insurance is canceled as result of your lender’s late payment, you can sue your lender.
  • Know your rights. Your lender must acknowledge your letter within 20 days and try to fix your problem within 60 days. If you’re still not satisfied, file a complaint with HUD.

Don’t worry, however, if your escrow account balance is temporarily negative. It’s probably due to a recent increase in your taxes or insurance. Your lender will pay your taxes and insurance, although you will need to reimburse your lender for the shortfall.

A final word: Usually basic home owners insurance will be paid out of an escrow account. If you have extra coverage for your original Matisses, for example, you may need to pay that premium directly to your insurer.

Susan B. Weiner has written on financial topics for Bottom Line/Personal, Financial Planning, Wealth Manager, and other national publications for more than 15 years. She learned firsthand that when your house combines two lots, your escrow account may initially fail to pay the tax bill on the second lot.

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These articles are not intended to give legal or tax advice, and you should consult your attorney or financial advisor for additional information.

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