Question:

What is an escrow account?

Answer:

A borrower should know what an escrow account is, and why it is established. The best way to explain why lenders are using an escrow account at all is to say that failing to pay property taxes and insurance are a way for the lender to lose their collateral as a first mortgage lien is subordinate to tax lien only. Also, should a natural disaster occur, and the house is destroyed, the lender loses its collateral if homeowners insurance have not covered the house at the time of the disaster.

The escrow account is an account set and cared for by a real estate broker, lender or an independent third party. A mortgage lender would set an escrow account to make sure that tax and insurance payments run in a timely manner; lenders will want to make sure about that as they risk losing the collateral in case the house is destroyed and hazard insurance payments have not been on time, or the state may attempt foreclosure if property taxes have not been paid.

The lender may ask for a fee for servicing an escrow account, and will ask for a deposit in the escrow account that is calculated on the basis of the biggest tax and insurance payment throughout the year, monthly escrow payments made by that time, and a maximum of two month cushion.

How To Calculate the Escrow Account Deposit

To make precise calculations of the maximum escrow deposit the lender would ask for, make a table for twelve months ahead of the time you are entering a mortgage, put in when tax, insurance and other items paid with escrow account funds amount to the greatest shortfall. The greatest shortage plus the 2-month cushion will make the maximum deposit to put in an escrow account at the time of closing. Sometimes, state law or the lender will ask for lower cushion in the escrow account.

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