Who's Responsible for Escrow Accounts?
Escrow accounts are commonly associated with mortgage loans. Lenders use escrow accounts to save money to pay for expenses including property taxes and homeowners insurance fees. The account itself is managed by the lender, who is responsible for submitting payments as they are due. You are responsible for paying the escrow amount each month with your mortgage payment.
The total cost of home ownership consists of different expenses, including a mortgage payment, property taxes and insurance fees. When you obtain a mortgage loan, the property acts as collateral. The lender holds an interest in the property until the loan is paid in full. Failure to pay property taxes can result in a tax lien placed on the property or, ultimately, foreclosure. A lapse in insurance coverage might cause a total loss of the property in the event of a disaster. The lender wants to ensure that neither of these events occur. By requiring you to establish an escrow account, the lender ensures that taxes and insurance are paid on time. Not every borrower is required to have an escrow, but it's common if you obtain the loan with less than a 20 percent down payment.
It is the lender's responsibility to calculate how much will need to be paid in escrow fees each month. This is done by simply totaling all of the fees due for a year and dividing by 12 to find out the monthly payment amount. Lenders are allowed to collect an additional two months' worth of payments to act as a cushion in case there is a change in the tax or insurance bills. The lender must then submit payments on time to the proper payee on your behalf. Payment schedules will vary based on how your tax collector and insurance provider have arranged their billing cycles.
Providing you with notifications and statements about your escrow is also the responsibility of the lender. Each year, the lender analyzes your escrow accounts to determine if any adjustments are necessary based on changes to the tax rates or insurance fees. The lender provides you with a summary statement at the end of each year detailing the transactions in and out of the account and shows what changes will be made for the following year. If your loan is sold -- as many mortgages are -- to another lender, the first lender needs to provide a written notice.
The biggest responsibility you, as a borrower, have is paying the escrow fees each month. But you should be diligent in monitoring your account. Read all letters and correspondence from the lender, and save those that deal with changes to your escrow account. Watch for any notices from the taxing authority claiming you are delinquent. Contact the lender immediately if you receive such a notice. If you would rather pay the bills directly yourself but you were required to establish an escrow, the lender might be willing to cancel the escrow over time. Usually, you can contact the lender after you have paid the loan balance down to below 80 percent of the original principal. The choice to cancel is ultimately up to the lender.