Escrow

How Escrow Accounts Work

Escrow accounts work somewhat like savings accounts for homeowners. Any money that is deposited is saved in the account and used to pay property taxes, as well as homeowner's insurance.

In almost all cases, deposits are made on a monthly basis with the mortgage loan payment. Payments accrue at the bank or lending institution. The lender then becomes responsible for paying the borrower's insurance premiums and property taxes on or prior to the due date.

The amount that needs to be placed in the account initially and on a monthly basis is determined by the cost of insurance and a tax assessment of your property. This amount tends to fluctuate each year as premiums rise and further assessments are completed.

Though these accounts are not a lending requirement for most mortgage loans, they may be required of borrowers who have less than 20 percent to put down on a home purchase. The account acts as a sort of insurance for lenders who may be at risk of not recouping their money if a house is seized due to non-payment of taxes.

If your lender demands that you have an escrow account at the time you take out your loan, you can usually get rid of it once you have paid down at least 20 percent of the mortgage loan. However, it may be beneficial to keep the account for the entire term.

Pros and Cons

There are many pros to having an escrow account—especially for fist time homeowners who don't want to have to deal with the whole mess of paying insurance and taxes themselves. Missing a payment on either of these items can be very damaging financially.

Another benefit is the budget factor. It's much easier to come up with money for large tax bills when the money is paid on a monthly basis rather than all at once.

The bad part about an account combined with your loan is the fact that it causes your monthly payment to fluctuate. Even with a fixed rate mortgage, payments can change on a yearly basis if insurance payments rise or if a new tax assessment is made.

But again, taxes and insurance premiums are bills that must be paid anyway. If you don't come up with the money on a monthly basis, you will have to come up with it in one lump sum.

Escrow Scams Online

Escrow fraud runs rampant online. The unfortunate thing is that most people are not even aware that this type of fraud exists until they become a victim of it. To make sure they don't lose their money or personal information, there are a few things homebuyers need to look for before signing up for an online service:

• A legitimate service will not have a web address that ends in .org, .biz, .info, .cc, or .gov.
• Borrowers should always make sure the service is backed by a U.S. company. Many scams are headed by overseas companies.
• Services that do not provide a telephone number or a real person to talk to are probably not legitimate.
• Reputable services will not have sloppy content, spelling errors, or other mistakes on their site.
• Anyone can throw a logo on their website. If the service claims to be a member of the Better Business Bureau, check it out.

If you are looking for a reputable escrow service online, there are many available. One worth checking out is Escrow.com. Be careful though, many scam sites copy Escrow.com's template and text.