- Lenders in the U.S. require escrow accounts for borrowers who put less than 20 percent in equity into a down payment (or 10 percent in California FHA and VA loans). Lenders use escrows to pay for the property taxes and homeowners' insurance on the property being used as collateral on the loan. That is because if those go unpaid, the liens on or any damage to the property reduces the value of the collateral backing the loan. Some borrowers prefer to keep their escrow accounts to simplify budgeting even if they no longer need an escrow account once they've paid the loan down to 80 percent (or 90 percent in California) of the property's value.
- Lenders determine the monthly escrow payment every 12 months by estimating homeowners' insurance and property taxes over that period. Because property taxes or insurance premiums can increase, lenders usually keep an additional "reserve" amount in the account, although New York does not allow reserves and in other states those are capped at a set percent or number of months. The U.S. Real Estate Settlement Procedures Act requires that lenders send you an annual statement showing current payments, projected changes and any shortages; the lender also must return excess funds in the accounts of more than $50.
- If your escrow is for a loan on a newly built home, your monthly escrow may rise significantly once property taxes change from the lower rate (for an empty lot) to the higher rate for one with a house on it. Also, homeowners' insurance premiums often increase significantly after claims are filed, which would also increase your escrow amount.
- You can use the lender's annual escrow statement to discuss any changes you believe may be mistaken . For example, the lenders' automated databases may have created an error when accessing the property-tax assessment used to estimate property taxes, or it may include insurance coverage that already may be covered by your homeowners' association, such as flood insurance.
- Advertisement -
- Advertisement -