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Wendella Ault Battey, LLC
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Hartford, CT

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November 2008 Tip

Have you ever wondered what happens with your escrow funds paid through your mortgage? Sadly enough, most people don't really understand how escrow works and why their mortgage payment increases if they have a fixed 30 year mortgage.

The truth of the matter is that if you have a fixed rate loan your monthly principal and interest payment will not change. The reason your payments may increase is because your taxes and insurance increases, if they are being collected by the Lender as part of your monthly mortgage payment. The Lender pays your taxes and insurance from your escrow account. Prior to making the payment before its due date, the Lender will receive a notice of the amount to be paid. If there is an increase in the payment over the previous year, the Lender will pay the increase and then notify the homeowner that their mortgage payment must increase to cover the new projected amount next year based on the recent payment. In addition, the homeowner will also receive notice of a shortfall in the escrow account as a result of the increased payment the Lender has made. This shortfall is often a surprise to the homeowner as it can range anywhere from a few hundred dollars to several thousand dollars. The Lender has two options it presents to the homeowner. Either pay the shortfall in a lump sum check or spread it out over a twelve to twenty four month period.

Here's the Tip For Today:

If you can pay the shortfall in a lump sum payment, then this is preferable to spreading it out. Remember your taxes and insurance will probably increase annually. Therefore you may receive the same letter every year from your Lender informing you of a new shortfall and increased payment. You may never be able to keep track of whether you've paid off the previous shortfall before there is a new one added.

You can actually avoid the surprise of the shortfall by contacting your insurance company and taxing authority to determine how much of an increase you can expect and when it will become due. You can then forward a check to the lender for the increase amount with instructions for the funds to be placed in your escrow account. If you do not specify the funds should be applied to the escrow account the Lender may apply it to reducing your principal balance. Be vigilant every year and keep track of your taxes at least thirty day before it's due. Remember to shop for lower insurance rates at least once a year.

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