How Mortgage Escrows Work

Mortgage applicationA mortgage escrow is a legal arrangement under which a bank collects money from a homeowner on a monthly basis and uses the funds to pay annual real estate taxes and hazard insurance on the property. When a bank agrees to loan money to a borrower to buy a home, it often also requires that borrower to set up a separate escrow account for the taxes and insurance. Lenders require borrowers to set up an escrow account to ensure that their security in a home is not jeopardized by a borrower’s failure to pay taxes or insurance on the property,

A bank will typically require an escrow account for buyers who put less than 20 percent down towards the purchase of a home.  The actual amount you pay monthly will depend on your annual property tax and hazard insurance. Federal banking rules regulate how much a bank can ask you to legally escrow each month. In most cases, the lender will collect one-twelfth of the annual real estate tax, and one-twelfth of your annual insurance premium each month. The amount collected from you is deposited in a separate escrow account and used to pay the tax and insurance bills when they become due.

In theory at least, the money accumulated in an escrow account should yield interest. However, mortgage lenders rarely, if ever, pay any interest on the amount they collect from you each month by way of escrow. In fact, most banks will require you to pay a nominal one-time fee in order to set up the escrow account for you.

The lender who services your loan is required to send you an annual statement itemizing the amount of money deposited into the account over the past 12 months and the total amount out paid out on taxes and insurance during that period.

For more information on mortgage escrow accounts and how they work in Covina and other parts of southern California please contact the real estate professionals at Eastland Escrows.

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