When you buy a home, if you put less than 20 percent down, you may need to pay your taxes and insurance into an escrow account with your lender to “set aside” funds. In addition, at closing you may have to put two monthly mortgage payments in escrow as a reserve. Although it’s unlikely you’ll use a reverse mortgage, if you do you’ll have to set aside money for taxes, insurance, repairs and servicing fees.
If a lender has to make periodic payments for you, it won't want to draw the money out of your bank account. Instead, it'll hold what you owe in an escrow account and take it from there. This will happen automatically if you've got a Federal Housing Agency mortgage and your down payment is less than 20 percent. Conventional lender requirements vary. You typically see principal, mortgage and interest, or PMI, insurance in conjunction with mandated escrow accounts.
Taxes and Insurance
Escrow payments usually include homeowner's hazard insurance and real estate property taxes. Lenders set aside these insurance and tax funds to the proper entities. They accrue until your mortgage lender uses them for payment. Lenders typically pay your homeowner's insurance annually and your property taxes semi-annually or annually. That all depends on individual city or county requirements.
Set Aside Example
Your home insurance premium totals $300 per year. Your city and county combined property tax bills equal $2,700 per year. This brings your total for insurance and taxes to $3,000. Consequently, your monthly payments will include a payment of $250, or $3,000 divided by 12 months. That's what the lender will set aside in an escrow account.
Reverse Mortgages Explained
With a reverse mortgage, the lender capitalizes your interest payments and adds them to the outstanding principal balance. You repay the loan only when you sell or refinance the home. Although the elderly are the primary users of reverse mortgages, they may be advantageous for others in special circumstances. For example, if you inherit a home, and it's all paid for, you could get a reverse mortgage for much smaller than the home's value. This allows you to access cash you don't have to repay until you sell the home. The time limit may differ for younger users of reverse mortgages.
Reverse Mortgage Set Asides
Reverse mortgages typically require set asides for taxes and insurance. Lenders always set aside the service fee that comes with reverse mortgages. Some reverse mortgages set aside a portion of the original principal balance to make needed repairs on the property. If you're in that situation, you'll just need to notify your lender or servicer to start the process.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.