Why mortgage escrow accounts? - Landmark Mortgage

Mortgage escrow accounts have been in the news lately and seem to be greatly misunderstood by many consumers. The original idea behind mortgage escrow accounts was to protect the interests of homeowners and they have been serving that purpose for more than 50 years.

The History of Escrow's

Mortgage escrow accounts came into being more than 50 years ago. In the 1930's, many Americans were losing their homes in foreclosures because of late tax payments. To help ease the burden on homeowners who had to come up with large, lump sum payments at tax time, lenders agreed to take on the responsibility by collecting smaller monthly sums from homeowners along with their mortgage payment. In 1934, the government mandated that lenders manage escrow's on all FHA insured mortgages. This then became the standard practice for all mortgages.

Why Mortgage Escrow's?

Mortgage escrow accounts ensure that homeowners' property taxes, fire and hazard insurance premiums, mortgage insurance premiums and other escrow items are paid in a timely fashion. They are a guarantee that there is always enough money to pay these bills when they are due so that the homeowner avoids the risk of lapsed insurance coverage or delinquent taxes.

Who's Protecting The Homeowner?

Escrow's are governed by the Real Estate Settlement Procedures Act of 1974 (RESPA), administered by the U.S. Department of Housing and Urban Development (HUD). Lenders must manage their escrow accounts in compliance with this federal law and with the interpretations set out by HUD.

In addition, the 1990 Housing Bill recently signed into law by the President, requires lenders to issue itemized statements of escrow accounts to borrowers on an annual basis. While many lenders are already providing homeowners with regular statements of their escrow accounts, the new law should ensure that every lender follows this practice.

Who Should You Talk To?

Escrow's as practiced by the nation's lenders protects both the borrower and the lender. Borrowers who have questions or concerns about their escrow accounts should talk to their lenders immediately. Consumers who know the purpose of escrow's and are aware of the benefits they provide are the best insurance against misunderstandings between borrowers and lenders or misleading information from any source.

What Escrow's Do For Home Buyers

Guarantee that bills are paid on time

The most obvious advantage of escrow's is that they automatically budget the borrower's tax and insurance responsibilities over the course of a year. Homeowners do not have to worry about coming up with several large, lump sum payments, each with different due dates, throughout the year. If there is ever a fire in the home, or if the basement floods causing damage, the homeowner is assured that the home is protected by up-to-date insurance.

Unexpected increases are taken care of

Because of escrow's, homeowners also do not need to worry about calculating unexpected increases in their taxes or insurance premiums. It is the responsibility of the lender to allow for possible increases in these payments.

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