Money in escrow is “dead money". It doesn’t earn interest for you and it doesn’t reduce your mortgage interest payments. Therefore every cent in your escrow account is costing you money. Make sure there is no more tied up in escrow than there needs to be!
Here is a brief summary of what lenders can and cannot do regarding escrow. I'll also explain how to check your own escrow account to make sure you are not paying too much.
State laws vary; you should consult your own attorney to determine what your local laws allow.
The way lenders handle escrow is regulated by the Federal Real Estate Settlement Procedures Act, which applies to all “federally related mortgage loans".
Unless local law says otherwise, at settlement the lender can require a borrower to deposit funds in an escrow account set up for the payment of taxes or insurance premiums. The sum deposited cannot exceed the actual amount of the taxes and premiums, plus one-sixth of their estimated total.
If the taxes come due in January and you are settling in July, your first month's payment will be due Sept. 1. For September, October, November and December, you will make four months’ escrow payments. Since the lender will require a full year's payment in January, and at that time only four months’ payments will be in escrow, the lender can escrow eight months at settlement, plus one-sixth of the total amount, which amounts to an additional two months’ worth of escrow.
Thus, at settlement, do not be surprised if the lender requires you to pay 10 months’ tax payments into escrow. These funds are held by the lender and paid when the taxes come due.
The rules apply until you pay off your loan. In other words, the lender can hold two additional months’ escrow, so that if you are delinquent in one or two monthly payments, the lender will still have sufficient funds.
At least once a year, the lender that services your loan must send you a statement clearly itemizing “the amount of the borrower's current monthly payment, the portion of the monthly payment being placed in the escrow account, the total amount paid into the escrow account during the period, the total amount paid out of the escrow account during the period for taxes, insurance premiums . . . (as separately identified) and the balance in the escrow account at the conclusion of the period. "
When you receive this statement, you should review it carefully. Confirm with your taxing authority and your insurance company exactly when the payment is due and the amount of the payment. Use a calculator to determine whether the lender has properly calculated the amount of the escrow. Congressional testimony has uncovered many errors made by mortgage lenders.
There are also many cases in which lenders fail to pay the real estate tax on time - or at all. Often, the first time that homeowners learn of this non payment is when they receive a notice of tax sale from the jurisdiction where their property is located.
If you are required to escrow for taxes and insurance it is a very good idea to write to your lender annually, demanding proof of payment of the real estate taxes and insurance premiums. If the lender does not respond promptly, contact your taxing authority to confirm payment of the taxes, and complain about the lack of response to your state or local financial regulatory authority.
Home owners who have 20% or more equity in their property - that is, if they borrow or refinance 80% or less than the value of the property - have the right to receive a notice from the lender that they may pay their own taxes and insurance without escrow. This is a wise thing to do as your money is better off working for you than sitting in a non interest bearing escrow account. This is of course providing that you have the financial discipline to have the funds available when it comes time to pay your taxes and insurance!
WARNING: Some lenders try to increase the mortgage rate when the borrower opts to avoid escrow. You should talk to your attorney who will likely advise you it is illegal for the lender to do this. Again, MAKE THE EFFORT. It can be worth a great deal of money to you in the long term.
Unfortunately, escrow for taxes is a way of life in the mortgage industry. However, as a borrower, you have the right to review and analyze - and complain if you find that your escrowed funds are not being handled properly. After all, this money belongs to you until it is paid to the taxing authority or the insurance company.
You can easily check your own escrow account.
To determine whether your escrow account balance is excessive, divide all annual expenses paid out of that account by 12.
For example, if your annual expenses are $1,200, the lender would need $100 a month for payments.
If your monthly escrow payment is significantly higher than $100, the lender may be overcharging. Some lenders establish separate escrow accounts for each item to be paid, rather than making all payments out of the same fund. But regardless of the method used, at some point in the year, there should be no more than two times the monthly payment in the account (in the above example there should be no more than $200 in the account for at least one month of the year), or a smaller amount if the mortgage contract specifies one.
Should you find that you are being excessively charged you need to contact your lender for a satisfactory explanation because THIS IS COSTING YOU MONEY.
$500 in your escrow account is $500 that is not coming off your mortgage. You are paying interest on this which over the years can compound out to significant amounts of money. In fact over a 30 year loan at 8% this $500 will have cost you $5,431.92 in additional interest. Is that worth fighting for?
I encourage you to make the small effort required to monitor your accounts. It’s so easy to be complacent and assume that all is as it should be. TAKE RESPONSIBILITY for your finances. When it comes to your money, you are the only person you can really trust.
For more information on bank overcharging visit me at www.BankSentinel.com
Yuri Szilasi is the owner of http://www.BankSentinel.com a site dedicated to recouping mortgage overcharges from lenders. Mortgage overcharges are endemic worldwide and cost Americans alone over $8 Billion each year.