Significance

• Mortgage lenders offer escrow accounts to their borrowers to ensure that the two major bills are paid in full each year. It is in the mortgage lender's best interest to ensure that both of these bills are paid in full to protect the property and ensure that no liens are attached to it, in the event of foreclosure. The escrow balance is an additional fee added to the monthly mortgage payment of principle and interest.
  
  

Function

• The escrow account divides the yearly premium for the two bills, hazard insurance and property taxes, into smaller monthly payments to make the payment more budget friendly. For a fixed rate mortgage, the only way in which a borrower can see a rise or fall in his monthly mortgage payment is if his escrow account changes. In many cases, the insurance and property tax rates can change from year to year, causing a rise in the monthly payment to the borrower. Sometimes, if there is a large change from year to year, the borrower could be required to make a one-time lump sum payment to cover the additional monies due.
  
  

Time Frame

• In most cases, the hazard insurance is due to the insurance company twice a year while the property taxes are due once per year. If the borrower receives these two bills in the mail, he is to forward the information onto the mortgage company for payment. The mortgage company will pay these bills, usually within 30 days of receipt, from the balance in the escrow account. At this point, the borrower's escrow account will be assessed to see if a change must be made in the monthly payment. In many escrow accounts, the bills are forwarded directly to the escrow account administrator, so the borrower doesn't have to do anything to ensure that the bills get paid.
  
  

Considerations

• While the borrower may choose to forgo the escrow account and pay these two bills out of pocket, he may suffer a one-time escrow waiver fee or an increased interest rate. However, he is able to save the money himself for the two bills and accrue interest on the balance while waiting for the bill to arrive. For some mortgages, such as FHA, USDA, and VA mortgages, the escrow balance may not be waived. In addition, if the borrower's loan to value ratio is too high or his credit score is too low with a conventional mortgage, he may not qualify for a escrow waiver either.
  
  

Misconceptions

• If a borrower's mortgage escrow balance is assessed and the monthly payment increases dramatically, the borrower does not have to accept the increased payment as is. He can contact his mortgage lender and request the balance be prorated over a longer period, ask to pay the difference in one lump sum, or see if another compromise can be agreed upon before accepting the higher monthly payment.