Posted on: 19th Jul, 2011 11:39 pm
I'm taking out a mortgage and my lender was talking about escrow account. A dear friend of mine said that there will be loss of interest earnings. What is that all about? Can anyone explain?
Hi Harvey,
Your friend is right. After you establish an escrow account with the lender, the lender gets to keep the interest earnings on the account. This is the case in most of the states. In order to know the interest loss, you should multiply the escrow account balance every month times 1/12 of the interest rate that you would have received if the account was yours.
Take care
Your friend is right. After you establish an escrow account with the lender, the lender gets to keep the interest earnings on the account. This is the case in most of the states. In order to know the interest loss, you should multiply the escrow account balance every month times 1/12 of the interest rate that you would have received if the account was yours.
Take care
I believe that it was a federal mandate a number of years ago that required lenders/servicers to pay interest on escrow accounts to borrowers.
I had never heard of the term "loss of interest earnings" in reference to escrows before. I'm curious to know where your friend got the term and the expertise to go with it.
I had never heard of the term "loss of interest earnings" in reference to escrows before. I'm curious to know where your friend got the term and the expertise to go with it.
George, I believe the loss of interest earnings refers to what the borrower could potentially be losing on investment returns with the money the lender/servicer gets up front at closing and then monthly for property taxes and home owners insurance before those items actually come due.
Depending on how frequently (annual/semi-annual) and how much the annual property taxes are (plus the home owners insurance), it could be better to waive escrow, if possible, and invest during the interim.
Of course, this only works if there is a viable safe investment paying a sufficient return. Right now savings accounts, money markets and the like are hardly paying any interest and other investments could potentially end up losing value which would be counterproductive to say the least.
Depending on how frequently (annual/semi-annual) and how much the annual property taxes are (plus the home owners insurance), it could be better to waive escrow, if possible, and invest during the interim.
Of course, this only works if there is a viable safe investment paying a sufficient return. Right now savings accounts, money markets and the like are hardly paying any interest and other investments could potentially end up losing value which would be counterproductive to say the least.
Gotcha, Jim; thanks. I agree that there's not much out there paying much of anything, and those that promise to pay a high rate of return are the ones taking the greatest risks; and therefore, the most likely to underperform anyway.
New Jersey does not pay interest on escrow accounts. I suspect other states do not do so either. NJ regulations auhtorize NJ to do so up to 2%, but, they have never chosen to do so.
In this economic environment you would be hard pressed to find a transaction account that pays over 1% interest. By paying the money into the escrow account, you are probably losing someplace between $1 and $100 a year. That can hardly be a reason to not escrow.
The advice is being given because it sounds knowledgable and cool, but, financially means next to nothing.
In this economic environment you would be hard pressed to find a transaction account that pays over 1% interest. By paying the money into the escrow account, you are probably losing someplace between $1 and $100 a year. That can hardly be a reason to not escrow.
The advice is being given because it sounds knowledgable and cool, but, financially means next to nothing.
And as we all know, "knowledgeable and cool" sounding advice is precisely that, and usually nothing more. "Experts" who are not within the industry about which they speak are usually just like armchair quarterbacks in football. Since they never have to get out there and prove their worth, it can never truly be questioned; so people follow along blindly.
It's a shame.
It's a shame.