Homeowners Mortgage Policy & Escrow Information

What is an impound/escrow account?

An escrow/impound account is an account set up by the lender for you to prepay certain recurring costs, such as property taxes, hazard insurance, and mortgage insurance (if required). The amounts collected at the closing depend on the time of the year the loan is closed. Most Homeowners Mortgage borrowers find this an easier and ultimately less expensive method than paying the items on their own.

With a refinance loan, you'll get a new impound/escrow account and the old lender will close your current impound account and send you a check for the remaining balance.

Why do I have to prepay property taxes and how are they calculated?

We need to make sure that our new mortgage is secure, so they require you to deposit an amount ranging from 2 to 12 months of your property taxes into an impound or escrow account in advance. Tax liens take priority over mortgages so we need to insure the taxes are being paid to protect our lien against the home.

Each county and state has its own formula to calculate property taxes, but for the most part, your home's assessed value is multiplied by the local tax rate. We assume a 1.25% tax rate unless your application or appraisal indicate otherwise.

Why do I have to prepay hazard insurance and how is the cost calculated?

Hazard insurance covers the cost to rebuild your home in the event it is damaged, for example, by a fire or severe rainstorm. We require that you purchase hazard insurance at the loan closing. After all, our security on the loan is the property and if it has been destroyed by a fire and cannot be rebuilt, we are at risk. (It would be a disaster for the homeowner as well.)

For a refinance loan, we may require you to renew your hazard insurance coverage for up to 1 year. Hazard insurance is based on the loan amount and the total annual cost is normally between 0.35% and 1%. Generally speaking, if the policy is due to renewal within 3 months of closing, a new 1-year premium may be collected at closing.

Can I Waive Escrow?

Please remember that escrow accounts must be administered according to federal law, which means that every lender will have the same net money collected at closing and will hold the same amount in reserve.

Who's Protecting The Homeowner?

Escrowing is governed by the Real Estate Settlement Procedures Act of 1974 (RESPA), administered by the U.S. Department of Housing and Urban Development (HUD). Lenders must manage their escrow accounts in compliance with this federal law and with the interpretations set out by HUD.

In addition, the 1990 Housing Bill signed into law by the President, requires lenders to issue itemized statements of escrow accounts to borrowers on an annual basis. While many lenders already provide homeowners with regular statements of their escrow accounts, the law should ensure that every lender follows this practice.

What Escrows Do For Homebuyers?

1. Guarantee that bills are paid on time. The most obvious advantage of escrows is that they automatically budget the borrower's tax and insurance responsibilities over the course of a year. Homeo