With the rather daunting experience of a home purchase behind you, you now settle down to the business of making your regular payments. You open your mortgage statement and see ‘to be paid by mortgagee’ and wonder if you should have paid more attention at the closing. Whether you should have or not, if you see that phrase, it means your lender or bank who issued you the mortgage loan -- as the mortgagee -- is responsible for that particular item. You are the mortgagor -- think "borrower" -- so in addition to your regular mortgage payments, pay attention to any additional items that you may need to pay
Escrow Account Basics
An escrow account is a fancy name for an account where funds are held until a payment needs to be made. While you are waiting for your home purchase to close, or finalize, an escrow account holds the funds needed to complete the transaction. It’s kept in safekeeping by an escrow company or agent, who then makes sure everyone, such as the seller and real estate agents, gets paid. After you close on the sale, the escrow account continues to hold funds that your mortgagee may need to pay certain ongoing expenses. Some states require an escrow account, but even if you live in a state that doesn’t, your lender can require it.
Common Items Paid From an Escrow Account
The two most common items paid from an escrow account are property taxes and insurance premiums. You are really paying for these, because a portion of your monthly payment goes into the escrow account, and then when those bills become due, the mortgagee – your lender – has to pay those bills. The total amount you pay for all of this is called a PITI payment – principle, interest, taxes, and insurance. The mortgagee can require a small cushion in the escrow account, but the amount of that cushion is governed by the Real Estate Settlement Procedures Act, or RESPA.
Deciding on Whether to Have an Escrow Account
When you are working on your mortgage terms, you can ask about the pros and cons of an escrow account, but the decision may not be yours to make -- it may be required by either state law or your lender.. Having everything combined into your regular mortgage payment can be easier to budget and it’s nice to not worry about that big tax bill every year or making the insurance payments on time. The mortgagee is motivated to pay these bills on time for its own protection, since your home is what is securing the mortgage until it’s paid off, but you should still check your statement each month to make sure.
Other Things You Should Know About the Escrow Account
The cushion in your escrow account allows for increases in taxes and insurance. However, because of RESPA you can’t be forced to pay in more than one-sixth of the charges that escrow pays.. If you overpay, you might get a nice refund check that year and see your PITI decrease; if you underpay, the mortgagee will have to make up the difference and then you can be sure your PITI will be adjusted higher. Remember: It’s still your money, so monitor your escrow account statement and make sure that your bills related to your home are being paid on time.
- Homebuying Institute: The Mortgage Escrow Process Explained. Cornett, Brandon. 2011.
- Bankrate.com: Understanding Escrow Accounts
- U.S. Department of Housing and Urban Development: FAQs about Escrow Accounts for Consumers
- Total Mortgage Services: What is PITI? Principal, Interest, Taxes, Insurance
- Cornell University Law School Legal Information Institute – Mortgage Law: An Overview
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