Escrow Collection - Payment of tax and insurance

Collection refers to an agreement that allows the property seller (or any other party) to deposit a certain amount of money in a particular account. The money is then released on a monthly basis in order to reduce the borrower's monthly payments during the initial years of the mortgage loan. During the specified period, the effective interest rate is brought down below the actual interest rate.

In mortgage transactions, the lender or the seller collects the property taxes and insurances premiums paid off by the buyer or the homeowner as a part of the monthly payment. This is known as escrow collection. There are different organizations that offer escrow collection services. These services include the carrying out of the receipt and disbursement of regular payments.

The collection escrow comprises of the following services:

• Accounting services:
  This includes maintaining records of the interest paid, principal balance and cash reserves, if any.
  
  
• Disbursements of payments:
  The funds deposited in the escrow account are disbursed according to the instructions of the parties involved in the mortgage transaction.
  
  
• Reserves for paying taxes and insurances:
  The parties involved in the transaction will hold funds in reserve for payment of taxes and/or insurances.
  
  
• Addbacks for taxes and insurance payments:
  If the seller or the lender is responsible for paying taxes and/or insurance then the escrow collection services will make adjustments to the principal balance upon receipt of notification from the Seller or payee.
  
  
• Annual Statements:
  The collection services also provide a summary of the year's transactions. This summary is provided to each party at the end of the calendar year.
  
  
• IRS Reporting:
  The escrow collection services issue 1099INT and 1098 forms at the end of each calendar. The services are such that they comply with the interest reporting requirements of the Internal Revenue Service.
  
  
• Pay-offs:
  When a mortgage is fully paid off, the release documents are recorded. A final accounting is provided to both the parties after the release document is issued.