Q: In an earlier column, a question was asked on payment of interest on accounts in escrow. In your reply, you used Maryland and the District of Columbia as examples. Would you please direct you answer to the same question for the Virginian?
A: We have received a number of letters on the subject of the escrow account. Perhaps this is good time to summarise the law in all jurisdictions dealing with the rights of the lender to collect monies in escrow for future taxes and insurance.
When you pay mortgage each month, generally the payment includes principal and interest on the loan, and often the lender requires that you pay 1/12th of the future taxes and 1/12th of the future insurance into an escrow fund. The origin of the letters PITI thus stands for "Principal, Interest, Taxesand Insurance."
Escrow for taxes and insurance have become a significant consumer issue throughout the country. The complaint is often raised that the lender is holding the consumer's money, and the consumer is receiving no interest on these funds. As a result of consumer pressure, legislatures throughout the country have enacted reforms dealing with these escrowed funds. Unfortunately, in Virginia, the legislative has not yet responded to the consumer complaints. In Virginia, lenders have the rights to collect each month 1/12th of the future taxes and insurance, and no interest need be paid on these escrowed monies.
In Maryland, on any first mortgage loan made by a bank or a saving and loan association on Maryland property after May 31, 1974, if the lender requires you to pay taxes and insurance into an escrow fund, the lender must pay you interest at the regular passbook savings account rate of that institution. The interest is to be paid annualy to you by crediting your escrow account with the amount of the interest due.
In the District of Columbia, any lender making a first mortgage loan at a rate over 8 per cent on District property must give you the choice of paying your own taxes and insurance, if the down payment that you make equals 20 percent or more of the total purchase price of the property. However, it is to be noted that if you elect to let your lender collect these escrows, there is no requirement that interest is earned on these funds.
Here is a suggestion for District homeowners: Set up a separate savings account with your mortgage lender. Write one check each month which includes the principal and interest, and enough funds for 1/12th of annual taxes. The tax money can be deposited in the savings account automatically by your lender, and when tax time comes around, you will have saved a sufficient amount of the taxes, and earned interests as well.
Some Virginia lenders are willing to arrange a similar program for you, if have established a good payment track record with them on your mortgage. It certainly is worth talking to your lender.