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House Calls: That Escrow Account

Edith Lank on

Dear Edith: Our purchase offer was accepted, and we are excited about moving into our new home. But we have a question about our monthly mortgage payment. It's more than we figured because of escrow. We have a good record of paying our bills, but the bank says it will collect every month and keep track and pay our taxes and insurance. Is this really a requirement, or can we pay by ourselves? We would appreciate a prompt answer, as we close next week. -- D. S.

Answer: If your property insurance premiums weren't paid up to date and the house burned down, the lending institution -- the bank -- would be left with nothing but a vacant lot as security for the loan. If your property were ever seized and sold at auction for unpaid back taxes, the bank would end up with no security for your debt. That's why the bank wants to be sure those bills are paid as they become due.

Your credit record may be perfect, but lenders are seldom free to make exceptions. In most cases, lenders plan to bundle your debt with others and sell it on what is known as the secondary mortgage market. This frees up more cash so they can continue to make local mortgage loans. The secondary market has its own standards.

The term "escrow" refers to the status of that extra cash you'll send each month. It doesn't belong to the lender, and it doesn't belong to the insurance company or the local property tax office. It's still yours, but it's in escrow -- being held and ready to be released to pay future bills. You will receive regular accountings so you can keep track.

In addition to each month's estimated share of the expenses, your mortgage company is allowed to hold an extra two month's worth as a safety measure. In a few states you're entitled to receive interest on the money being held.

You can expect changes to your monthly mortgage bill over the years if it turns out the amount being collected is not enough or too much. Again, you'll receive explanations. And some day, when your mortgage is finally paid off, anything left in the escrow account will be returned to you.

Renters Insurance

Dear Ms. Lank: My daughter is away at college. Our neighbor says she should have tenants insurance. Have you ever heard of this? -- askedith.com

Answer: Your daughter's landlord has insurance on the building, but it doesn't cover her belongings. If she has valuable computer equipment, musical instruments and the like, a tenants insurance policy is relatively inexpensive.

Property Management Experience

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