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By Yuri Szilasi
Many people are paying more than they need to into their escrow accounts. A
simple check of your own account can save you thousands in interest over the
course of your loan.
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.
Yuri Szilasi is the owner of
www.BankSentinel.com (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.
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