Anyone who owns a home understands that in addition to making your monthly mortgage payment on interest and principal, you will be required to maintain and pay for homeowner’s insurance and will need to pay any property taxes or other assessments required by local jurisdictions. If these payments are not made, then the property (which is also the collateral for your loan) will be at risk, liens may be levied, and/or the property will not be protected if damaged by fire, storm or other cause.
This is why most mortgage lenders, including Litchfield Bancorp, require most borrowers to pay a pre-determined amount into an escrow account each month so that these regularly occurring expenses are covered. The lender then makes these payments as they become due. This relieves the homeowner of the worry of coming up with a large lump-sum payment for taxes once or twice a year, or worrying about monthly insurance payments. It also assures the lending institution that these very necessary obligations are being met.
It should be noted that this type of escrow account (sometimes also referred to as an impound account) should not be confused with the escrow fund that is normally established during the process of purchasing a home. This fund, usually administered by an impartial third party, is used to hold any deposits required for the purchase until the various conditions of the purchase are fulfilled to everyone’s satisfaction. These funds are then released to complete the sale, minus a small fee for the escrow officer who oversees the fund, and the escrow fund is closed. The escrow account discussed here is strictly an arrangement between the homeowner and the mortgage lender after the home is purchased.
The amount of the escrow account your mortgage lender will require will depend on the anticipated costs of your home owner’s insurance and the rate of local taxation you will have to pay. The amount can and usually will be adjusted up or down annually if the rates of insurance and taxation change. You are free to seek out a new insurance policy at any time if you think you can find a lower price, but be sure to inform the lender that you are doing this.
In certain instances, escrow can be avoided, for example, if the loan-to-value ratio is below 80%. But in those cases a lender may require a higher interest rate as a hedge against your failing to fulfill your obligations. You should also consider whether taking on those payments yourself is even a good idea. The additional cost of higher interest payments aside, do you feel confident that you can save for and pay a large tax bill when due? In some jurisdictions there are also separate assessments for things like water, sewers, schools, etc. Do you want to juggle all of those? For most people these are questions that answer themselves.
Assistant Vice President, Lakeville Manager
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