Expert: Jacqueline Kounkel - 6/12/2009

Question
QUESTION: We recently refinanced, and have applied to our new lender (Flagstar Bank) to have them pay our real estate taxes and insurance. Our current mortgage payment is $2206. Our real estate taxes are $4782
and insurance is $1300. The bank replied to our request, saying that the new monthly payment would be $2712, which makes sense because the additional $506 per month, when multuplied by 12, equals $6082, which is the combined amount amount of the real estate taxes and the insurance. Now here's the part I don't understand. They want in addition an initial escrow deposit of $3032 to establish the escrow account. I thought the additional $506 per month would cover the real estate taxes and insurance. So why would they need an additional $3032? If you could, try to keep your explanation as user-friendly as possible. Thank you.


ANSWER: Hello David,

That is entirely normal and this would occur with any lender that you decided to establish an escrow account with.  The reason for the extra deposit is to pay the escrow account current.  So to try and keep things simple, if you currently pay your taxes and insurance on your own, there is nothing currently in the escrow account.  Most banks require a 2 month cushion plus the up to date escrow that would be collected.  For example:  In Colorado taxes are paid twice a year and are getting ready to pay in August.  If I did not have an escrow account currently established and had decided that I would like to escrow now.....the bank would have to collect enough money to pay the 6 mos of escrows coming due and in some cases an extra 2 mos to ensure that they have extra monies if needed.  

This is the reason a lot of clients choose not to escrow due to the fact that they feel that too much is collected and they like to pay the exact amount when it is billed.  However, I escrow my taxes because it is easier for me and my bank gave me a small discount on my rate to escrow.  There is no wrong or right way, it is mostly preference and convenience.  

I hope that I answered your question :)  

Have a great day!!
Jacqueline Kounkel

---------- FOLLOW-UP ----------

QUESTION: I think I am beginning to understand it. What is the meaning of "rate" in the following: "my bank gave me a small discount on my rate to escrow." Is that like a fee? or is the bank charging you an extra amount besides the cushion? Thanks.

ANSWER: Hi David,

Lenders prefer that you set up escrow accounts as it releases risk from the lender in the case of default.  So in turn the lenders will not charge you a higher rate if you decide to escrow.  



---------- FOLLOW-UP ----------

QUESTION: I guess I'm not understanding part of this. Escrow is set up when you want the lender to take care of the property tax and home insurance. How is a 2-month cushion going to release the lender from risk, if, say, prop taxes for 3 months are owed? Wouldn't it be better for the lender to not be involved at all in the escrow? That would release his risk entirely from the prop taxes and home insurance. Please show me where my thinking is wrong.

Answer
Hi David,

If you have an escrow account set up on your loan the lender knows that the taxes and insurance are being paid, because they are paying them.  

They do not only collect 2 mos cushion of payments, they on top of that collect estimated taxes and insurance every month. and pay them at the end of a 6 mos period.  

If you are paying taxes on your own and you lose your job, it is a possibility that taxes may go unpaid and since they are paid twice a yr....the lender could end up responsible for 6 mos or more liened against the property.  

Does that help?