The History
of Escrow's
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 escrow's on all FHA
insured mortgages. This then became the standard practice for all
mortgages.
Why Mortgage
Escrow's?
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.
Who's Protecting
The Homeowner?
Escrow's are
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.
Who Should
You Talk To?
Escrow's
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 escrow's 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 Escrow's
Do For Home Buyers Guarantee
that bills are paid on time.
The most obvious
advantage of escrow's 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.
Unexpected
Increases Are Taken Care Of
Because of
escrow's, 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 Escrow's
Escrow's 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 home buyers.
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. More information on transferred loans can be found here.
