At closing, you will be required to deposit prepaid
real estate taxes and insurance premiums into an escrow
account. This account ensures that the taxes and insurance for the
property are paid and on time. This protects the lender from any tax
liens or uninsured losses that you can't repay.
The lender cannot require an escrow amount of more
than two months payment, according to the federal Real Estate
Settlement Act. The escrow amount is usually adjusted on an annual
basis.
The amount in the escrow account varies due to tax
assessments and insurance premium adjustments. The lender will cover
any shortfalls and adjust your monthly mortgage payment to make up
for any increases in taxes or insurance premiums. Your monthly
mortgage payment may fluctuate from year to year, even if you have a
fixed-rate mortgage.
Some lenders will allow you to pay your own property
taxes and insurance premiums, especially if you put more than 20%
down. But many lenders will raise the interest rate to make up for
the additional risk that this creates.
Once you have an escrow requirement, it is hard to get
a lender to cancel it. If your loan is sold, and there is nothing in
the transaction that provides for the cancellation of the escrow
account, you are at the mercy of your new mortgage servicer.
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