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At closing, you will be required to deposit real
estate taxes and insurance premiums into an escrow account (sometimes
called an impound account). An escrow account ensures that the taxes
and insurance will be paid, and on time. This protects the lender
from tax liens and uninsured losses that the borrower can't repay.
The federal Real Estate Settlement Act limits the
amount lenders can require in escrow to a maximum of two months'
payments. Escrow assessments and adjustments are generally made
annually.
How escrow accounts are managed
The amount in the escrow account varies during the year due to tax
assessments and insurance premium adjustments. The lender typically
will cover any shortfalls until it can adjust your monthly payment
to make up for tax hikes and premium increases. Your monthly mortgage
payment will fluctuate from year to year, even on long-term, fixed-rate
loans.
Can I avoid escrow?
Yes. Some lenders allow you to pay your own property taxes and home
insurance premiums, especially if your loan-to-value ratio is below
80 percent. But don't be surprised if the lender boosts your interest
rate to compensate for the additional risk they're assuming.
Once an escrow requirement is in place, it can be
difficult to persuade a lender to cancel it. If your loan is sold,
as is common, and there is nothing in the lending agreement that
provides for cancellation of the escrow requirement, you'll have
to live with the decision of your new mortgage servicer.
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Chapter 6: Closing
