Is there a limit on how much my mortgage lender can make me pay into an escrow account for interest and taxes?
Yes, if your loan is a federally related mortgage loan under the Real Estate Settlement Procedures Act (RESPA), there is a limit on how much the lender can make you pay into an escrow account.
While an escrow account is not required for every loan, it can be an important protection for you because it helps make sure you have the money you need to pay taxes and insurance when they are due. Failing to pay taxes and insurance can result in additional costs and fees and even lead to foreclosure.
If you have an escrow account with your mortgage, you generally will have to pay a certain amount into escrow at closing, as a part of your “cash to close.” You may also have to pay into your escrow account an amount for taxes and insurance as part of your regular mortgage payment. If your loan is a federally related mortgage loan under RESPA, then there are limits on how much a lender can make you pay, both at closing and in your recurring mortgage payments.
Before your loan closes, the lender will estimate the total annual expenses that need to be paid from the escrow account. They can require you to pay a part of the estimated annual total in advance, but only enough to make sure that the escrow account never carries a negative balance, plus an additional two months’ worth of estimated disbursements to serve as a cushion. On top of these amounts, every month, your mortgage servicer can require you to pay up to one-twelfth of the total annual escrow payments that they reasonably anticipate paying out of the escrow account. For most mortgages with an escrow account, the loan servicer must provide an initial and annual escrow account statement that shows the account history and a projection of activity for the next year.
If you have a loan that’s considered “higher-priced” under the Truth in Lending Act then you might be required to pay into an escrow account for at least the first five years of the loan. Some loan types require escrow for the entire term of the loan. You’ll be notified by the lender or servicer if your loan is in this category, or if there’s an exception that applies to you.
See our Guide to Buying a House for more information about the home lending process and costs of closing on a home.
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