Escrow Accounts

Escrow accounts defined | Escrow tips

How often have you heard a new home buyer say, "I had to put money into an escrow account"? Do you know what that means, or how these accounts work when you buy a house?

If you don't, you're not alone. Most folks don't have the foggiest idea.

Escrow Accounts Defined
An escrow account is a special savings account that's set up when you take out a mortgage. The money in the account (or accounts) covers your estimated real estate taxes and home insurance when they come due. But the account protects the lender's hide, not yours, because you're paying all that money in advance. To make matters worse, most lenders don't pay you any interest on that money.

By law, one month each year your escrow account should contain no more than one-sixth of your total insurance and tax bills. For example, if the annual total comes to $3,900, then there has to be a month during the year when your account has no more than $650 in it.

Escrow Tips

• If you believe you're paying too much into the escrow account, have a chat with your lender. If that doesn't remedy the situation, call your state government, starting with the state attorney general's office.
• If you've paid off at least 20 percent of your mortgage and have a squeaky-clean payment record, you might be eligible to stop paying escrow. Or, if your down payment on the home was more than 20 percent and your credit record is very good, you may be able to escape escrow altogether.

Start planning your escrow account by jotting down the payment due dates and amounts on items such as your insurance premium, local and county taxes, and any special assessments such as a schools tax. Figure which bills the seller has already paid for the year and which ones are still owed. Then determine what you'll need to shell out for escrow on a month-by-month basis.

By Robert K. Heady, Tribune Media Services syndicated columnist