The system of mortgage escrow accounts was created with good intentions. On the one hand it was to make the lender happy, because the lender got some guarantee that no lien prior to his own will be put on the mortgaged property through taxes or insurance, on the other hand, it was to save the borrower the pain of large lump sum insurance and tax payments. Everybody was expected to be happy, and that’s how it has worked for many people since, but sometimes even the best-laid plans fail.

Ideally, the system works as follows: when you sign your mortgage contract, among other things you agree to trust the property taxes and insurance to be paid by the lender with the money from your special set up for this particular purpose escrow account. Thus, in the course of your mortgage’s life, every period mortgage payment will need to contain a certain extra amount that is deposited into your escrow account. When the time comes, the lender takes the initiative and pays the taxes and insurance premiums in a lump sum using the money accumulated in the account. In other words, you, as a borrower, don’t have to pay the bulk money yourself, you save it gradually, thus making the big payment less painful. Just fine, you’d say, but why do I need the lender to do it for me, if I feel quite capable myself? Read the rest of this article »