The Benefits Of An Escrow Account
As a homeowner, you always hope to get the lowest mortgage rate possible. One way to lower your rate is to agree to escrow your real estate taxes and insurance. Why do you get a lower rate when you escrow? Because escrowing your taxes and insurance makes it less likely your home’s tax bill won’t get paid or that its insurance coverage will lapse.
When you escrow, the lender doesn’t have to worry about a seizure on the property by tax authorities, nor do they need to fear losses from property damage resulting from inadequate insurance coverage.
Escrowing reduces your lender’s risk, so your lender rewards you with a lower, better mortgage rate quote. It can also simplify your life a bit. Instead of managing your real estate tax and hazard insurance due dates on your own, when you escrow the funds, your mortgage lender pays your bills on your behalf.
Escrow accounts can also make it easier to budget. Instead of making large payments to your loan taxing authority twice annually and to your homeowners agent, you just pay a small amount monthly and the money is “saved” for you.
How Lenders Manage Your Escrow Account
When you escrow your taxes and insurance, the law offers you protection from your lender. The Real Estate Settlement Procedures Act (RESPA) protects borrowers by prescribing how mortgage lenders may handle escrow accounts. For example, RESPA requires lenders to conduct an annual escrow analysis. The purpose of the analysis is to ensure that a lender does not overwithhold borrower monies.
Lenders may not hold more than 2 months of “extra” payments in escrow for a borrower. Overage must be refunded RESPA also requires lender to provide borrowers with an Initial Escrow Disclosure Statement with 45 days of closing, as well as an Annual Escrow Account Disclosure Statement at least once every 12 months. These annual statements are intended to provide information regarding the anticipated tax and insurance activity in the escrow account.
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