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When you close on your mortgage loan, you are going to be required to deposit money into an escrow account (commonly called an impound account). This money is used to pay for real estate taxes and insurance premiums. An escrow account ensures that the taxes and insurance are going to be paid, on time. This protects the lender from tax liens and uninsured losses that the borrower can't repay.

The amount lenders can require in escow is limited to two months' payments by the federal Real Estate Settlement Act. Assesments and adjustments are typically made annually.


How are escrow accounts managed?
As a result of tax assessments and insurance premium adjustments, the amount in the escrow account varies during the year due. The lender will normally cover any deficits until it can amend your monthly payment to make up for premium hikes and tax increases. Therefore, you can expect your monthly mortgage payment to change from year to year, even on long-term, fixed-rate loans.

Is there any way to avoid escrow?
Yes. It is common for some lenders to allow homeowners to pay their own home insurance premiums and property taxes, especially if your loan-to-value ratio is below 80%. Don't be surprised if your lender increases your interest rates to make counteract the extra risk that they are taking on.

As soon as an escrow requirement is in place, it can be hard to convince a lender to terminate it. If your loan is sold, as is common, and there is nothing in the lending agreement that provides for termination of the escrow requirement, you'll have to deal with the decision of your new mortgage servicer.


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