Impounds, Escrows and the Aggregate Adjustment
Published on Tuesday, 26 July 2011 03:39 Written by Lawrence D. Brudy & Associates, Inc
If your property is destroyed by a fire or other disaster, the lender will have lost it’s collateral. Also if your taxes are left unpaid, the municipality, city or state can foreclose on your property in order to obtain payment and the lender could lose it’s collateral. Because of that the lender wants to make sure your insurance premium and property taxes are always paid.
The lender collects your property taxes and your hazard insurance premium in a non-interest bearing escrow account. The Real Estate Settlement Procedures Act (RESPA) does not allow the lender to earn interest on YOUR money that is set aside to pay your taxes and insurance premiums
RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. Your lender or servicer will review the amount in the escrow account annually and notify you of a shortage or excess. Should a shortage exist, usually due to an increase in tax millage rates levied by your municipality, your monthly mortgage payment will increase over a several month period (based on amount of shortage) to pay the difference. Excess is returned to the borrower.
Your escrow account typically includes a "cushion" or an extra amount to ensure that the lender has enough money to make the payments when due. RESPA does not require lenders to maintain a cushion and limits the amount of the cushion to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. At the closing of either a purchase or a refinance where the lender requires an escrow account to be established, the borrower will “impound” or deposit a portion of the annual taxes and insurance premiums into the escrow account. Those “impounds” are then added to the escrow portion of the new monthly mortgage payments the borrowers will begin making after closing. The amount you “impound” at closing depends upon the time of year you close and how many payments on your new loan you will make before the next bill is due. The goal is to have 12 months worth (a full year) of each bill in the account by the time each comes due. In Pennsylvania, property owners pre-pay taxes one year in advance. For example, if you close in December and your next tax bill is due in May, you will make 3 payments before that bill is due, or 3 months worth of that bill will be deposited into your escrow account. Therefore at closing the lender should require 11 more months (calculated monthly by dividing the annual bill /12) to be “impounded” into the account. When combined with the 3 additional payments you will make, the total account balance will include 1 full year plus 2 additional months (the “cushion”). Although your “cushion” is established at closing and will remain in your account, it is by definition more than what is needed to pay your taxes and insurance premiums. Therefore at the time of closing the lender is also required to give you a credit for these excess monies that will remain in your account. This is your aggregate adjustment. The aggregate adjustment is an accounting calculation, but is quite near the 2 month “cushion” of all taxes and insurance premiums in the account.
RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs (for example, FHA and VA loans) or lenders may require escrow accounts as a condition of the loan.
If you have a Conventional Loan and you do not have PMI (Private Mortgage Insurance), you have the option to close your escrow account and make your own tax and insurance payments. If you have a VA or FHA loan, the maintenance of an escrow account was a condition for the funding of your government-insured loan. In this case, the escrow account cannot be waived or altered.
Contact any of the firm's attorneys at (724) 935-1400 for more information