Commonly Asked Questions on Escrow Accounts Established to Pay Real Property Taxes or Insurance or Both

A. Background Information

Q.#1. What is an "escrow account"?

A. Generally, an escrow account is a special savings account deposited in a financial institution; it is segregated and held for a specific purpose. Escrow accounts, in connection with mortgage loans, are used commonly to hold the deposits to ensure they are available to pay real property taxes or insurance payments, or both.

Q.#2. How is an escrow account established?

A. An escrow account is commonly required by documents (the note or mortgage) signed in connection with taking out a mortgage loan. The account will usually be established in the financial institution which made the mortgage loan to the consumer.

Q.#3. What can the escrow account’s money be used for?

A. The mortgage documents specify how the money is to be used. Generally, they will state that the money is for property tax payments and insurance payments (for example, credit life, homeowner’s, or flood plain insurance.

The money may only be used for property taxes and insurance and for no other purposes. For example, funds may not be withdrawn by either the consumer or the financial institution for a mortgage payment, a bounced check fee, or a water or other utility bill.

B. Payments to an Escrow Account

Q #4. How does money get into the escrow account?

A. Generally, a consumer will make a single monthly mortgage payment to the mortgage lender. That payment will have various components: principal and interest, property taxes and, possibly insurance (ex., home owners, flood plain, private mortgage insurance (PMI), etc.).

For example, if a consumer’s monthly payment is $650, $450 may be for the principal and interest, $150 may be for the property taxes, and $50 may be for credit life insurance. The $150 for taxes and the $50 for insurance will be deposited into the escrow account.

Q.#5. How much should be paid into the account?

A. Generally, the consumer should pay sufficient money into the account over the year to cover the anticipated property taxes and insurance. Mortgage documents commonly contain language that states that one-twelfth of the estimated taxes and insurance should be paid into the account. These are usually determined by referencing the prior year’s amounts. However, federal law authorizes a financial institution to require an additional one sixth of the estimated taxes (i.e., two months payments) to be deposited in the escrow account.

For example, if 1997 property taxes were $2,400, it may reasonably be estimated that they may be the same amount for 1998. Therefore, a financial institution may request a consumer to pay $200 each month for taxes along with a mortgage payment. The financial institution may also require an additional $400 to be paid into the escrow account over the year’s 12 months (i. e., an extra $33.33 – possibly rounded to $34) each month to accumulate an additional 2 months’ taxes.

Q.#6. Must I absolutely have an escrow account?

A. If the mortgage documents require it, a financial institution has the legal right to require escrow account. However, some financial institutions may not want to deal with the escrow account’s red tape, for example paperwork and computer programs. A financial institution may voluntarily waive the escrow account requirement and leave it up the consumer to save for the property tax and insurance. Other financial institutions may waive the requirement if the consumer makes regular deposits into a passbook account maintained in that financial institution to save for taxes and insurance.

If a consumer does not want an escrow account although mortgage papers require one, the consumer should ask an officer of the institution to waive it! The financial institution is not under an obligation to waive an escrow account, but may do so. The consumer will never know unless he or she asks.

Q.#7. Will my escrow account be paid interest?

A. Most escrow accounts will be paid interest. The interest rate is 2.51% for 2000 (and the interest is taxable). To receive interest on an escrow account, the following requirements must be met:

A.) Loan must be for residential property (not commercial, manufacturing or retail property);

B.) The original loan or the most recently refinanced loan must have originated after January 31, 1983

C.) The original loan or the most recently refinanced loan must have been originated by a bank, savings bank, savings and loan association, credit union or mortgage banker;

D.) The escrow account must be required by the lender (and not be voluntary).

E.) The escrow account must be for the payment of taxes or insurance, or both.

An exception to the above general rule is that if the mortgage papers permit it, no interest on escrow is required if the financial institution sells the loan to an unrelated third party not related to the lender and the funds are help by the third party.

Interest is paid on WHEDA (Wisconsin Housing Economic and Development Authority) loans. For WDVA (Wisconsin Department of Veterans Affairs) Loans, interest is required only on loans originated after May 3, 1996: however, while not required, many lenders voluntarily pay interest on escrow accounts originated on May 3, 1996 or earlier.

C. Release of Escrow Funds

Q.#8. How and when is the money in an escrow account used to pay property taxes?

A. A consumer has three choices of how and when to pay the property taxes. However, to make this choice, the consumer must be current in loan payments. The choices are:

A.) Have the financial institution, by December 20, send the consumer a check for the escrow account’s funds to pay the property taxes. The check is made payable to the borrower and the municipality (ex., Jane Smith and the City of Waukesha). The check may be made payable to the consumer only in the sole discretion of the financial institution. By March 31, a consumer selecting this method must send the financial institution a receipt for taxes paid.

B.) The financial institution can pay the taxes by December 31 if the consumer sends the tax bill to it by December 20.

C.) Pay the property taxes when due. State law provides the following payment schedule which applies if your local governing unit has not provided a different schedule.
           · If you pay by installment, the first payment is due by January 31. Pay to the local treasurer.
           · If not paid in installments, taxes must be paid in full by January 31. Pay to the local treasurer.
           · July 31 is the last day for payment of the second installment of real estate taxes. Pay to the county treasurer.
(Guide for Property Owners, Dept. of Revenue, April 1997, p.12)

[Note: Some consumers pay property taxes every other calendar year for possible tax advantages.]

Each borrower should have been given at least one choice of the above three alternatives. If the consumer does not recall the method he or she has selected, the consumer should ask the financial institution.

A consumer may change the timing and method of payment by notifying the financial institution by November 1 of the new choice if the borrower is current in mortgage payments. If not, the financial institution may select the method.