Dear Harry: I have two questions regarding escrow accounts for taxes and insurance. We just bought a new home with a mortgage of $175,000. We were given a choice of paying into an escrow account or paying an extra eighth of a point in interest to be able to pay the taxes and insurance ourselves. We chose the escrow to save us the trouble of paying the taxes and insurance and having to prove to the mortgagee that it was done. Question number one: How are the monthly payments to the escrow calculated? Number two: Will we earn interest on the account since nothing is mentioned in the agreement?
What Harry says: There are regulations regarding escrows in the Real Estate Settlement Procedures Act (RESPA). The lender may have a cushion of two months payments. Beyond that, you are required to start with enough of a prepayment to cover the taxes and insurance when due. For example, if the taxes are $3,600 a year, due in December with a settlement in August, the two-months' cushion would be $600 and the initial set aside at settlement would be $2,400. The monthly payments for each remaining month of $300 would get that up to $3,600 by the due date of the taxes. The insurance calculation would be in exactly the same form. The two would be combined to give you a single escrow account since RESPA does not permit two separate ones. Sorry, but there is no interest payment requirement for the amounts in escrow.