| 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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