Escrow Accounts: What Mortgage Borrowers Need to Know
An "escrow" account is usually set up when you get a mortgage and it is maintained with money from your loan payment. Your mortgage servicer will then use that money to pay your real estate taxes, homeowners (hazard) insurance and other costs that you have agreed to. While borrowers are sometimes required to have an escrow account, you may be given the choice of paying the taxes and insurance directly on your own, without an escrow account.
Even if you aren't required to use an escrow account, it may be a good idea to have one. "You don't have to worry about saving enough money in your bank account to pay your property taxes or homeowner's insurance when the bill comes due annually or semiannually," said Ron Jauregui, an FDIC Community Affairs Specialist. "You also don't have to worry about forgetting to pay your taxes or insurance, in which case you could face penalties ranging from late fees to extra insurance charges to, potentially, losing your home."
But if you have an escrow account, you need to monitor it. "Mistakes do happen, so people need to check that their taxes and insurance are being paid properly and on time," said Donna Nordenberg, an FDIC attorney who specializes in consumer issues. Examples can include a loan servicer sending a tax payment late (triggering a penalty) or failing to pay the homeowners insurance (which can result in the policy being canceled). Review mail from your local taxing authorities and property insurer to watch for unpaid bills.
Luke W. Reynolds, Chief of the FDIC's Outreach and Program Development Section, also recommended checking the required annual statement from your lender that shows the transactions to and from your escrow account and projections for the next year. "Review this statement closely and compare it to your property tax and insurance bills," he said. "Contact your loan servicer immediately if concerns arise, such as if it appears the lender paid a different amount than what's on the bill."
Also remember that if your property taxes are increased, your escrow payment will rise, too.