Escrow Accounts – Why, When, Who
As a home buyer, you will hear about escrow accounts from your Realtor® and your lender. In this article, we will examine both. The Realtor®’s escrow account is used to hold funds given to them when a offer to purchase is made and/or when a sale occurs. By law, the Realtor® is required to keep this account separate from their operating funds.
Mortgage escrow accounts are special accounts set up by the lender in which money is held for their clients property taxes, fire insurance, mortgage insurance premiums and other items such as monies with held as a condition of mortgage approval.
Escrow accounts assure the borrower that their expenses will be paid< on a timely manner by the lender. Each month the lender collects from the borrower 1/12 of the combined debt for the items listed above. When each item is due the lender will make direct payments on behalf of the borrower. If the premiums for escrow items increase, and if the lender failed to account for these increases, the lender will pay the shortage and settle up with the borrower later.
Real estate property taxes are levied as liens. Having escrow accounts assures the borrower and lender that liens on the property are paid on time.
Does the lender require everyone to have an escrow account? Well, no. But those who can avoid escrow accounts have made very large down payments. Perhaps as much as 1/3 down. Escrow accounts are a way for the lender to offer low down payment mortgage options to the public.
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