Many people are paying more than they need to into their escrow accounts. A simple check of your own account can save you thousands in interest over course of your loan.Money in escrow is "dead money". It doesn’t earn interest for you and it doesn’t reduce your mortgage interest payments. Therefore every cent in your escrow account is costing you money. Make sure there is no more tied up in escrow than there needs to be!
Here is a brief summary of what lenders can and cannot do regarding escrow. I'll also explain how to check your own escrow account to make sure you are not paying too much.
State laws vary; you should consult your own attorney to determine what your local laws allow.
The way lenders handle escrow is regulated by Federal Real Estate Settlement Procedures Act, which applies to all "federally related mortgage loans".
Unless local law says otherwise, at settlement lender can require a borrower to deposit funds in an escrow account set up for payment of taxes or insurance premiums. The sum deposited cannot exceed actual amount of taxes and premiums, plus one-sixth of their estimated total.
If taxes come due in January and you are settling in July, your first month's payment will be due Sept. 1. For September, October, November and December, you will make four months' escrow payments. Since lender will require a full year's payment in January, and at that time only four months' payments will be in escrow, lender can escrow eight months at settlement, plus one-sixth of total amount, which amounts to an additional two months' worth of escrow.
Thus, at settlement, do not be surprised if lender requires you to pay 10 months' tax payments into escrow. These funds are held by lender and paid when taxes come due.
The rules apply until you pay off your loan. In other words, lender can hold two additional months' escrow, so that if you are delinquent in one or two monthly payments, lender will still have sufficient funds.
At least once a year, lender that services your loan must send you a statement clearly itemizing "the amount of borrower's current monthly payment, portion of monthly payment being placed in escrow account, total amount paid into escrow account during period, total amount paid out of escrow account during period for taxes, insurance premiums . . . (as separately identified) and balance in escrow account at conclusion of period."
When you receive this statement, you should review it carefully. Confirm with your taxing authority and your insurance company exactly when payment is due and amount of payment. Use a calculator to determine whether lender has properly calculated amount of escrow. Congressional testimony has uncovered many errors made by mortgage lenders.
There are also many cases in which lenders fail to pay real estate tax on time - or at all. Often, first time that homeowners learn of this non payment is when they receive a notice of tax sale from jurisdiction where their property is located.