Ask Our Broker With Peter G. Miller: Inflated Escrow?
Question: We just had closing and the lender took way more than needed for the escrow account. How is this possible?
Answer: Most likely the lender is well within its rights to set aside a large escrow amount. In addition, you will benefit.
The lender wants to make sure that the property is not foreclosed because it serves as security for the mortgage. In other words, if you don't pay the mortgage, the lender can seize the property and then sell it off through the foreclosure process to get back the money it loaned.
The lender wants to assume as little risk as possible, so if you buy a home with less than 20 percent down, the lender will require the establishment of an escrow account to cover certain costs. Under the terms of the mortgage you will be required to make payments into the escrow account. As an example, let's say your property tax bill is $6,000 a year, which means you’ll be charged $500 per month for escrow. In addition, maybe your property insurance costs $2,000 per year. That will add an additional $167 a month to your escrow payment. In total your monthly cost for escrow in this example would be $667.
Under the federal Real Estate Settlement Procedure Act (RESPA), the lender can add to the account three ways:
First, the lender can have as much as 12 monthly payments in the account. That's $8,000 in this example.
Second, the lender is allowed to keep a two-month cushion in the account. That's another $1,600.
Third, the lender is allowed to keep an additional sum of money, as much as $50, in the account.
The total allowable amount in the account is $9,650. From this amount the lender will pay property taxes and property insurance directly.
What happens if the lender has excess funds in the account? Once a year the lender must provide a statement showing the account status. If too much money is in the account, the lender will send you a check. If too little is in the account, the lender will require you to increase your monthly escrow payment or add a lump sum to the escrow account.
Borrowers who purchase with more than 20 percent down often can avoid the establishment of an escrow account. However, for reasons of convenience and budgeting many prefer to have one.
If you feel your lender has charged too much for escrow then asked for an explanation of the charge. If the cost is above allowable limits speak with the settlement provider or lender to see if the matter can be corrected.
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Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.