Commonly Asked Questions on Escrow Accounts

Q.#1. What is an "escrow account"?
A. Generally, an escrow account is a special savings account deposited in a financial institution; it is segregated and held for a specific purpose. Escrow accounts, in connection with mortgage loans, are used commonly to hold the deposits to ensure they are available to pay real property taxes or insurance payments, or both.

Q.#2. How is an escrow account established?
A. An escrow account is commonly required by documents (the note or mortgage) signed in connection with taking out a mortgage loan. The account will usually be established in the financial institution which made the mortgage loan to the consumer.

Q.#3. What can the escrow account’s money be used for?
A. The mortgage documents specify how the money is to be used. Generally, they will state that the money is for property tax payments and insurance payments (for example, credit life, homeowner’s, or flood plain insurance.

The money may only be used for property taxes and insurance and for no other purposes. For example, funds may not be withdrawn by either the consumer or the financial institution for a mortgage payment, a bounced check fee, or a water or other utility bill.

Q #4. How does money get into the escrow account?
A. Generally, a consumer will make a single monthly mortgage payment to the mortgage lender. That payment will have various components: principal and interest, property taxes and, possibly insurance (ex., home owners, flood plain, private mortgage insurance (PMI), etc.).

For example, if a consumer’s monthly payment is $650, $450 may be for the principal and interest, $150 may be for the property taxes, and $50 may be for credit life insurance. The $150 for taxes and the $50 for insurance will be deposited into the escrow account.

Q.#5. How much should be paid into the account?
A. Generally, the consumer should pay sufficient money into the account over the year to cover the anticipated property taxes and insurance. Mortgage documents commonly contain language that states that one-twelfth of the estimated taxes and insurance should be paid into the account. These are usually determined by referencing the prior year’s amounts. However, federal law authorizes a financial institution to require an additional one sixth of the estimated taxes (i.e., two months payments) to be deposited in the escrow account.

For example, if 2006 property taxes were $2,400, it may reasonably be estimated that they may be the same amount for 2007. Therefore, a financial institution may request a consumer to pay $200 each month for taxes along with a mortgage payment. The financial institution may also require an additional $400 to be paid into the escrow account over the year’s 12 months (i. e., an extra $33.33 – possibly rounded to $34) each month to accumulate an additional 2 months’ taxes.

Q.#6. Must I absolutely have an escrow account?
A. If the mortgage documents require it, a financial institution has the legal right to require escrow account. Lenders like to set up these impound accounts, as they are then certain that the property taxes and insurance will be paid on time, as they will be holding the money and paying these expenses for you. You can typically waive escrows on a conventional loan if your loan-to-value ratio is 80% or less. The key point is to convey to your lender or mortgage broker from the start that you choose to waive the escrow account option.

The lender may charge you an additional 1/4 point for this option to "waive escrows. "This is not an increase in the interest rate, but rather a one-time charge. If your loan is for $l00,000.00, for example, and you are paying no points, you would pay $250.00 for the privilege of waiving the escrow impound account. In the long run it may well be worth it.

contact: Kevin Salley, kcsalley@gmail.com