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Ask Dr. Don

Escrow cushions

Dear Dr. Don,
We bought our first home with a VA loan in 1986. We refinanced in 1995 with the same mortgage company, so we've been with the same company since 1986. They've changed names five times since then and changed their address once.

Our taxes went up about $500 this year, and our homeowner's insurance went up a penny, but our escrow payment went up $95 a month. Why, if our escrowed items went up $500 a year, did our escrow payments go up $1,200 a year? I called the mortgage company several times trying to understand why we were paying almost $700 more than we needed to, and they kept telling me I didn't have enough in escrow.

They suggested I send them an extra $600 for my escrow account. I sent in the check with the second house payment after the price increase. The added escrow didn't show up on our next bill, so I called the mortgage company to see why my payment still hadn't gone down.

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Well it wasn't "in the system" yet. After all that finagling it only dropped the payment down by $50. (Still $50 more than original payment.) So I asked the woman why it was still going to be $600 more than we needed in there.

I finally got a straight answer. I needed some cushion in my escrow account. The account was $38.12 short after they paid taxes and insurance, and the mortgage company requires a minimum escrow balance of $600, even after the taxes and insurance are paid.

I can understand the mortgage company wanting a cushion, but I think $600 is unreasonable. We have never had to have such an excess in our escrow account before. It has always been close to what was needed, and if it was short, they would tell us so we could send in the difference.

I don't know if we can pay our taxes and insurance ourselves. My husband said he read in the contract we can't. Is this acceptable?
Thank you for your help,
Connie Conundrum

Dear Connie,
The Real Estate Settlement Procedures Act addresses the amount of cushion a lender can require in a mortgage escrow account. RESPA limits the size of the cushion to a maximum of two months worth of escrow payments. The mortgage lender (or servicer) reviews the escrow account annually and sends a disclosure showing the prior year's activity and any adjustments needed in the escrow payments that you will make in the forthcoming year.

You should be able to figure out whether the cushion is excessive by reviewing this disclosure, adding up the estimated payments that will be made in the account in the current year and dividing that amount by six. That is the maximum cushion allowed in the escrow account. Cushions aren't required by RESPA, the act just limits the size of the cushion. Some states require lenders to pay interest on escrow accounts while others do not.

If the cushion your lender has required is above the RESPA standard, you should contact the lender in writing in a separate mailing from the mortgage payment. The lender has 20 business days to acknowledge the complaint and 60 business days to resolve the complaint. If the complaint is not resolved to your satisfaction, you can then file a complaint with the U.S. Department of Housing and Urban Development.

Keep making your monthly mortgage payment while going through the complaint process. You don't want to hurt your credit history by missing payments.

My guess is that you'll calculate the maximum cushion and find out that the mortgage company has properly adjusted your escrow payment.

It's common for FHA and VA loans to have escrow requirements. Mortgages with a low loan-to-value number or mortgages where the homeowner has pledged the proceeds of a savings account in lieu of having an escrow account are possible exceptions. You're seven years in on this refinancing, so it's no time to negotiate the escrow provisions in your current loan.

-- Posted: Oct. 22, 2002

Read more Dr. Don columns
See Also
15 must-know mortgage terms
Avoid escrow by doing it yourself
Financial advice glossary
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