5 Things You Didn't Know about Mortgage Escrow

A mortgage escrow is a third party holding account that collects money from a homeowner and allocates it to fees associated with owning a home. These fees, such as homeowner's insurance and property tax, are placed into the mortgage escrow account on a monthly basis to be paid on behalf of the homeowner. Although lenders require a borrower to maintain a mortgage escrow account, there are 5 things you may not know about a mortgage escrow that can help you in the long run. 

1. Escrow Accounts Are Not Required by Law

If less than a 20 percent down payment for the home price was paid, the lender will usually require that the borrower maintain a mortgage escrow account. It is in the lender's best interest to essentially force savings for these fees, since missed payments could jeopardize their security. This payment system was devised to prevent homeowners from going into foreclosure for not being prepared to pay a lump sum property tax fee.

2. Real Estate Settlement Procedures Act of 1974 (RESPA) Sets Limits

RESPA is a law enacted to protect borrowers from increased fees that a mortgage escrow should not be collecting. Some escrow companies require a cushion to ensure the account has a minimum balance. RESPA allows for a cushion, but limits the cushion to only two months of escrow payments or the limit outlined by state law, whichever is less.

3. You Can Demand Proof of Payment

The law requires the Annual Escrow Disclosure statement to be provided to a borrower once a year. The statement itemizes all the fees that were collected from the homeowner and the payments that have been made from the escrow account. Although the statement details payments made, it is still advisable to ask the lender to provide you with documentation that your property tax and insurance bill were paid properly. If your lender does not respond in a timely manner, you can contact your tax authority for payment verification and also file a complaint about your lender's unresponsiveness.

4. How to Calculate Escrow Payments

Add up all the fees that that you owe, such as property tax, homeowner's insurance, and any cushion that the escrow requires to be maintained in the account to determine how much money your mortgage escrow company should collect from you. Divide the total by twelve. This will be your monthly mortgage escrow payment.

5. You Cannot Be Held Responsible for Late Payments

In the event that a bill is not paid on time and a late fee is incurred, the escrow company is responsible for paying for this fee. A complaint can be filed if the lender refuses to pay the late fee. The complaint should be a written notice addressed to your lender, stating your concern and the disputed amount for which you think they should owe. The lender or mortgage servicer has 20 days to acknowledge receipt of your complaint and 60 days to provide a written response. During the interim, the full mortgage payment is still required, including any disputed amounts until the issue is resolved. Contact the Federal Trade Commission if you are not satisfied with the resolution of your complaint.

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