Ask Kim
Escrow Account Rules Vary
Do I have to pay the mortgage company to set up an escrow account for my property taxes for the year or can I just pay the taxes directly myself?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
July 7, 2004
Do I have to pay the mortgage company to set up an escrow account for my property taxes for the year or can I just pay the taxes directly myself?
The rules for escrow accounts vary from state to state. In North Carolina, for example, it's up to the lender to decide whether to require an escrow account. In other localities, such as Washington, D.C., you have the option to pay the bills yourself if your loan is for less than 80% of the home's value, says Patty Widerman of BB&T Mortgage and the Mortgage Bankers Association of Metropolitan Washington.And federal regulations require lenders to establish an escrow account for payment of property taxes and insurance premiums for Federal Housing Administration and Department of Veterans Affairs loans
Regardless of your state's rules, lenders are prohibited by federal law from charging you a fee to set up an escrow account. But interestingly, in some states -- such as Maryland and Virginia -- they actually may charge you an extra fee if you don't want to set up an escrow account. "Their concern is it's more of a risk if you pay the bills yourself," says Widerman.
Lenders aren't required to pay interest on the money in the escrow account under federal law (although the interest is required by some states), which is one reason why you might want to hold onto the money yourself it it's an option you have without extra charge.
Federal laws also specify how much extra money the lender can keep in the escrow account as a cushion -- a complicated calculation that is spelled out in the Department of Housing and Urban Development's Escrow FAQs page, which explains the escrow rules in detail. See HUD's Buying a Home page for other helpful information about your rights as a home buyer.