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How are Monthly Payments Handled in Escrow?

An escrow company will hold money in an escrow account for the buyer until that money is due to be distributed for payment of fees. Each month, when a homeowner send in a mortgage payment to their lender, they payment will usually include additional funds for the payment of taxes and insurance premiums. When payments such as these are made, the lender will take the principal and the interest due for the monthly mortgage payment and the escrow company will take the additional funds paid toward taxes and insurance and hold on to the funds until it is time to distribute them.

How an Escrow Company Works

Escrow companies serve as a financial safety belt for the mortgage lender providing a budgeting tool for buyers who otherwise may create serious risks by not paying mortgage insurance, homeowners insurance or property taxes on time. The escrow company collects a percentage of the money due for insurance and property taxes each month and later distributes the funds to the appropriate biller when due. An escrow account prevents the home buyer from being responsible for paying the correct amounts, on the correct dates, to the correct billers for these various fees associated with owning a home.

Escrow Account Limits

Federal law provides a padded buffer by which escrow companies are allowed to collect up to one-sixth over the amount that is needed to pay for taxes and insurance. Not all escrow companies will require excess deposits but it's important for home buyers to know that if your escrow company does require an overpayment, the most that they can require by Federal law is one-sixth more than the set monthly payment into escrow.

What if there's a Shortage in Escrow?

Sometimes, property taxes will increase or insurance premiums could go up causing a change in the amount of money that is needed to pay for taxes or insurance. The escrow company is responsible for notifying the buyer of any shortage that comes up so that the buyer can pay the difference that is due. Escrow companies can handle a rise in property taxes and a shortage in escrow in a number of ways including:

  • providing the buyer with a due date for the payment which allows time for the buyer to get the difference paid
  • paying the difference in the bill as a temporary courtesy and sending a notice to buyer for prompt payment
  • paying the difference in the bill as a temporary courtesy and then dividing the additional amount paid on the buyer's behalf into monthly installments over the next twelve months

The escrow company is responsible for paying the property taxes and insurance when they are due as long as there are sufficient funds in the escrow account to cover these costs. In the event that the escrow company fails to pay these fees when due and there was sufficient money in the account to pay them, the escrow company is held liable for any fees or penalties that may occur as a result of late payment. Many escrow companies will provide monthly statements to the buyer which provide information on deposits and disbursements that have been made but federal law only requires these statements to be sent to the buyer once per year.

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