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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.
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.
Mortgage
escrow accounts ensure that 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.
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,
requires 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.
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.
- 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.
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.
- 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.
- 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.
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.
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.
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