LESSON 23: ESCROW (IMPOUND) ACCOUNTS
In the last lesson, we mentioned that borrowers sometimes
have to pay money into escrow
accounts (also called "impound"
accounts in certain parts of the country) at closing. But what exactly
people think borrowers with long-term, fixed-rate loans will
always pay the same amount each year. False: The amount they
pay will sometimes fluctuate from year to year. The culprit
that unfixes the fixed loan is the escrow account.
essence, these accounts protect lenders from borrowers who forget
or choose not to pay real estate
taxes and insurance premiums.
Lenders don't want local tax authorities putting liens
against their borrowers' houses for unpaid taxes. Nor do they want
hurricanes to wipe out their collateral
only to find out that the homeowner's policies had lapsed because
those customers never paid their insurance bills. So, they require
borrowers to establish these accounts and pay a portion of their
yearly tax and insurance bills into them each month.
Tax assessment or rate changes
and insurance premium adjustments can happen any time over
the course of 12 months. Your escrow payments generally remain
constant for a year at a time, but then can adjust regardless
of whether you have a fixed-rate loan or an adjustable-rate
(continued on next page)