12 September 2007
Foreclosure doesn't just happen to people who don't make their mortgage payments. Your homeowner's association (HOA) can take your house or condo if you're not careful. In one case, a disabled California man lost his home in a foreclosure sale because he was $123 behind on his homeowner's dues. The house was worth $280,000. Unfair? Abusive? You bet!Read More »
Mortgage Escrow Accounts
By Kelly WingardNFNS Columnist
If you are a
first-time homebuyer in the process of getting a new home loan, the term
"escrow" may sound foreign to you. The American Heritage Dictionary
defines escrow as "money, property, a deed, or a bond put into the custody
of a third party for delivery to a grantee only after the fulfillment of the
conditions specified." Generally, this means a neutral third party hangs
on to an object of value until the terms of a contract have been satisfied.
When it comes to your mortgage, the word escrow also has
another connotation. It refers to the practice of adding an amount to your
regular mortgage payment, which your lender accumulates on your behalf to pay your
real estate taxes and homeowner's insurance. Mortgage companies often prefer
this type of arrangement (called "impounding") because it protects
their investment in your home should your property taxes or insurance come due at
a time when your wallet is flat.
Required Escrow
Accounts
The decision to require the impounding of your property
taxes and insurance into your new home loan is often made for you by the
lender. Sometimes, as with Federal Housing Administration (FHA) loans, the
government requires mortgage companies to establish escrow accounts for
borrowers. In these cases, your monthly mortgage payment will include
principal, interest, and an amount generally equal to one-twelfth of your
annual anticipated property tax and insurance bills.
Federal regulations allow mortgage companies to require
homeowners to pay in additional amounts as a cushion against increases in tax
and insurance bills. This amount cannot exceed one-sixth of the total annual
escrowed amounts, or approximately two months of extra escrow payments per
year. State regulations can reduce the amount of extra payments mortgage
companies require to be escrowed.
Sources:
HUD:
FAQs about Escrow Accounts for Consumers
Answers.com
- Definition
About the Author
Kelly Wingard is a
freelance writer and a 25-year veteran tax preparer. She is a regular
contributor to the
About the Author
Kelly Wingard is a freelance writer and a 25-year veteran tax preparer. She contributes regularly to the University of Illinois Tax School training manual for tax professionals.