First-time homebuyers are often surprised to find that lending institutions take a great interest in seeing that property taxes are kept up to date and insurance kept on the real estate.

In fact, with most mortgages, the borrower is originally required to prepay some taxes and insurance. Then the borrowers must also send in extra money with each month's payment, to accumulate in a fund for the next year's tax bills and insurance premiums.

Your bills are usually sent directly to the lender, who pays them on your behalf and sends the receipted tax bills to you.

Why does the lender care? Because if your property is ever sold for non-payment of taxes, that wipes out the mortgage claim on the place. The lender would be left with no security for the loan.

Same thing with what the bank calls hazard insurance. If you don't have it, what happens when the building burns down? The lender is left with nothing but a vacant lot as security for the loan.

So the bank cares. (The lender may require only enough coverage for its loan, and only for physical hazards to the property. As an owner, though, you will probably want full coverage, including other problems like theft and liability. Homeowners insurance is usually your best bet.)

The extra money you send in every month is really your own. It's kept in a separate escrow account, also known as a reserve or trust account. Federal regulations limit the amount that may be held, allowing the lender no more than a two-month cushion plus the appropriate percentage of the next bill due.

You are entitled to a detailed accounting at least once a year. And some day when the mortgage is paid off, the money left in your escrow account is returned to you. You'll notify your tax authorities and insurance company that bills are to be sent directly to you in the future; you'll pay them yourself.

Published: March 1, 1999

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