For many people, the role of the escrow company is confusing. Therefore, we wanted to discuss some of the basics so when it comes time for you to buy or sell a house, you will be informed. First, mortgage escrow accounts are designed to make sure a homeowner’s property taxes, fire and hazard insurance premiums, mortgage insurance premiums, and other miscellaneous escrow items are always paid on tie.
The escrow company not only pays these items on time but they also have the
responsibility of making sure there is enough money in the escrow account to cover the bills. Otherwise, a homeowner could find they have no insurance or that taxes were paid late, resulting in huge penalties. Remember, in addition to providing protection to the borrower, the escrow account is also designed to protect the lender.
As stated, the established escrow account means money is always budgeted for
mandatory fees from year to year. As the homeowner, you would not ever have to
worry about these items being paid, which removes a huge stress factor. Knowing your insurance is up to date provides peace of mind. In this case, if you ever found yourself faced with a fire, vandalism, or some other type of disaster, the money paid out of the escrow account has you covered.
Another huge advantage is that because of the escrow account, mortgages and down
payments are lower. For instance, the escrow provides protection for the investor of the home loan. Therefore, when an investor feels more secure about the investment, you can be sure better rates are offered. In addition, this means that many lenders will ask for a lower down payment, saving you money all the way around.
As far as the amount of money a lender can collect for the escrow account, this is a very specific law. In this case, a lender can require a monthly payment of 1/12 of the total amount of estimated insurance premiums, taxes, and other associated charges. In addition, the lender is allowed to collect an additional balance but not more than 1/6 of the estimated yearly payments. Now, if the lender finds the escrow account will not have enough money to cover everything, by law, the lender is allowed to require additional monthly deposits, which ensures everything needing to be paid is paid.
Sometimes, people will secure a mortgage loan with one lender only to have the loan sold or transferred to another institution. In this case, the new lender would take over responsibility of managing the escrow account. However, the new lender is also entitled to reviewing the account to make sure the amount of funds collected is actually sufficient. If there were, concern that insufficient money has been collected, the amount would be adjusted accordingly and you would be notified of the change.