At closing, you will be expected to prepay certain items that will be placed in special
escrow accounts by the lender. The federal Real Estate Settlement Procedures Act limits the
amount of cushion in these accounts to a maximum of two months of escrow payments.
Escrow accounts can include:
- Homeowners' insurance
- Property taxes. (The lender will pay your tax and insurance bills from the escrowed
money.)
- Private mortgage insurance. If your down payment was less than 20 percent of the sale
price, you probably are required to pay PMI. At closing, the standard is that three months
of PMI payments are collected. In some cases, PMI is paid annually, or in a lump sum at
closing.
- Interim interest, or daily rate of interest. You pay the mortgage interest from the day
of closing through the end of that month. (That's why most buyers try to save some money by
closing near the last day of the month.)
The escrow accounts ensure there always is money available to pay taxes and insurance
premiums on time. Your monthly mortgage payment will include 1/12th of the total tax and
insurance bills on your home for that year, so that the escrow accounts are replenished.
Lenders typically cover shortages when payments increase until your billing has been
adjusted to the new rates.
Reminder: The lender will charge a fee to set up these escrow accounts, usually from
$50 to $150.
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