INTRODUCTION
Like millions of homeowners, your
monthly mortgage payments cover
principal and interest and, probably,
something called an escrow account. But,
like many people, you may not know why
you pay into an escrow account each
month, how the amount is determined, or
how your lender disburses funds from the
account.
WHAT IS AN ESCROW ACCOUNT?
An escrow account is a fund your lender
establishes to pay property taxes and
hazard insurance as they become due on
your home during the year. In this way,
the lender uses the escrow account to
guard its investment in your home. For
example, if you did not pay your property
taxes, your municipality could sell your
home at a foreclosure sale. Similarly, if
you neglected to pay the hazard insurance
premium, a fire or flood that destroyed
your home would also destroy the
lender’s security for the loan.
MUST I HAVE AN ESCROW
ACCOUNT?
Most mortgage loans require escrow
accounts, but not all do. In some cases, if
your mortgage contract does not
specifically require an escrow account,
you may be able to negotiate with the
lender for the right to pay your own taxes
and insurance. This ability can help you
avoid having your money tied up until it
is needed. However, if you have a
mortgage insured or guaranteed by the
Department of Housing and Urban
Development or certain other federal
agencies it may not be possible to
negotiate the right to make your own tax
and insurance payments, and these
payments will have to be held in an
escrow account until the lender disburses
them on your behalf.
HOW MUCH SHOULD THE
LENDER CHARGE?
The goal of the escrow account is to have
enough money to pay taxes and insurance
when they become due. To achieve this,
the lender adds one-twelfth of the tax and
insurance amount to your mortgage
payment each month. For example, if
your taxes and insurance are $1200 per
year, the lender would collect $1200 in
twelve installments of $100 per month.
To cover possible tax or insurance
increases, the federal Real Estate
Settlement Procedures Act (RESPA)
1
permits the lender to add to the yearly
amount two months of extra payments
prorated monthly. So, the lender would
collect an additional $200 divided by 12,
or $16.67 per month, for a total escrow
payment of $116.67 per month.
1
12 U.S.C. § 2601 et seq. (2010).
HOME MORTGAGE ESCROW ACCOUNTS
prepared by
MOUNTAIN HOME AFB
GUNFIGHTER LEGAL OFFICE
To determine whether you are being
charged correctly, compare your escrow
payments with what you owe annually on
your hazard insurance and property taxes.
You can get this information from your
local tax authority and your insurance
company. If the lender charges you
substantially less than the required
amount, you will need to pay an
additional lump sum at the end of the
year. If the lender charges you
substantially more, it may tie up your
money unfairly, as well as violate the
RESPA regulations.
WHY DO MORTGAGE PAYMENTS
CHANGE?
Most lenders will analyze your escrow
account at least yearly to make sure they
are collecting enough money to pay your
taxes and insurance. If your taxes or
insurance premiums change during the
year, your lender will need to adjust your
payments accordingly.
DOES THE LENDER HAVE TO PAY
INTEREST ON ESCROW MONEY?
In most cases, no. But this is determined
by state law where your property is
located. Check with the state banking
commission or consumer protection office
concerning state requirements. Idaho law
is silent concerning home mortgage
escrow accounts.
ESCROW STATEMENTS
Most lenders provide an annual statement
indicating the amount paid out of the
escrow account and the balance in the
account. Read this carefully. If you have
any questions, ask the lender. If the
statement shows the lender has collected
more in escrow payments than it has paid
out, ask to have the money refunded to
you, unless you prefer to have it applied
toward next year’s payments.
COMPLAINTS
If you have a complaint about how your
escrow account is being handled, first try
to resolve it with your lender. If you
cannot resolve your problem with the
person handling your account, talk to a
supervisor or an officer of the company.
Be sure to keep a copy of any
correspondence you may have with the
lender.
Often, your state banking agency will be
able to help you, or at least direct you to
the state agency that can.
*This handout is general in nature. It is not a
substitute for legal advice from an attorney regarding
individual situations. (August 2021)
For additional information on this and other legal
topics, see the Air Force Legal Assistance Website:
https://aflegalassistance.law.af.mil
