If your home were ever seized and sold for unpaid back taxes, the lending institution would be left with no security for its mortgage. If the house burned to the ground, only the vacant lot would remain as security. So your lender has a direct interest in seeing that you pay your taxes and insurance premiums on time. With some mortgages, including all VA and FHA loans, an escrow account (reserve, impound, trust account) is set up for you by the lender. Each month, along with your principal and interest payment, you send one-twelfth of your anticipated property tax and homeowners insurance cost. As the bills come due, they are sent to your lender, who pays them on your behalf. Your lender is allowed to keep not only enough to pay the next bill due, but also a two-month surplus as a precaution. In about half the states, you are entitled to interest on your escrow account on certain types of mortgages. You will receive regular reports, monthly or yearly, on the status of the escrow account, which is, after all, your own money. At regular intervals, usually yearly, the account will be analyzed and your payment adjusted up or down, depending on whether the account shows a surplus or deficit. This adjustment can be a surprise to the homeowner with a fixed-interest mortgage, who expected monthly payments to remain at exactly the same amount for the full term of the loan. It is, of course, taxes and insurance costs that change, not—with a fixed-interest loan—the underlying principal and interest portion of the payment. |
