Escrow accounts were the topic of a recent question over at Cash Commons.  This is a great money, and personal finance question and answer site, hosted by “The Mighty Bargain Hunter”.

I thought I would discuss a few of the details about escrow accounts-considering the number of houses being sold to first time home buyers, with the recent tax credits, combined with low prices.  This is a great time to buy a home, if you are READY.

I found this link  very helpful in explaining escrow accounts, and it links to pages with examples of how the monthly amounts are figured.

In summary, an escrow account is a type of savings account, required by many mortgage companies, and their guarantors, such as FHA, VA that are designed to ensure there is money available to pay  your taxes and  home owners’ insurance.  The details about the amount required monthly  is given to you when you close your loan.  (One of the 100 pieces of paper you sign or initial!)

The escrow amount, is usually built into your monthly payment- many people forget there is one until they get a notice that they need to increase the amount because taxes or your insurance went up.

The reason for a mortgage escrow account, is to protect the lender, or mortgage holder from losing their collateral-your home.  How could this happen?

• you fail to pay your homeowners insurance- a fire occurs-now your home has no value-the lender’s collateral-gone with the wind….
• you don’t pay your taxes on your home, your state or county, sells the home on the courthouse steps-your mortgage holder is screwed!

Obviously, in this day and age, they can’t afford that-so-they require escrow accounts.

Now if you pay 20% down, have no PMI (Private Mortgage Insurance) and are working with a private lender, escrow accounts are not always required-just ask your lender-I haven’t had one in years.

Now the rules for escrow are complicated, but there are protections to keep unscrupulous mortgage companies from holding on to too much of your money for too long.  The Real Estate Settlement  Procedures Act or RESPA covers the rule lenders must follow.  This includes rules that prevent them from making you deposit excess amounts-if the amount deposited  is in error, and your balance builds up above 50 bucks above that needed-they are required to send you the money within 30 days.

But the lenders also have rules that allow them to have a “cushion” to make sure there is enough to cover expenses as they come due.  They can also require you to increase your monthly deposits if the account balance drops-or send a one time amount if they feel is necessary.

Now, of course, when you have someone “looking after you” ie paying your taxes and insurance, then what happens when they screw up and don’t pay.  This is one of those areas that causes great heartburn, because insurance may get canceled, tax liens placed and other potentially bad things happen.

So Millionaire Nurses know who is in charge of looking after them-THEY ARE!  As part of your financial planning, put a tickle reminder on your calendar to email or call your insurance agent periodically to make sure everything is in order.  Get to know the insurance people in your life enough so they will be comfortable calling you if there is a problem.

If you get a notice about a tax bill being late, don’t assume the mortgage holder will handle it-check on it right away-before penalties start to pile up.

Yes, you may say you don’t owe them, it wasn’t your fault-how easy will that conversation be with the folks at the courthouse.

So deal with these problems early before they become huge problems.  Just like an IV site infection,  prevention is way better than  sepsis, gorillacillins,  and ICU-become proactive with the biggest investment in your life,  YOUR HOME!