Real Estate - Mortgage Escrow Accounts

If you have purchased real property in Illinois and, like most people, you needed to obtain a mortgage to do it, you likely had to give the bank or mortgage company a certain amount of money in advance to be reserved for the payment of your property taxes and, in many cases, your homeowner's insurance. This is called an "escrow account."

Many lenders require some form of mandatory savings to insure that property taxes are paid in full and on a timely basis, and an escrow account is the most commonly used vehicle. It guarantees that borrowers do not become delinquent on their taxes and cause a tax lien to be filed against the property that would ultimately undermine the lender's interest in the property. In many instances, an escrow account also provides for homeowner's insurance premiums to insure against losses due to damage to the home. Escrow accounts are administered by the lender. The problem is that you do not receive any interest on the money that is deposited in the escrow account, and often the amount of money is significant.

Most borrowers in Illinois are unaware of their rights when it comes to such important financial matters. Additionally, borrowers simply feel like they have no control over the terms of the loan beyond selecting the most competitive interest rate for the appropriate length of time. Thus, if a lender asks that the borrower surrender two or three months' worth of taxes to be placed into an escrow account as an initial deposit, plus make monthly payments, the borrower does not dispute it for fear that the loan will not be approved. Nevertheless, Illinois law does provide certain protections to borrowers.

The Illinois Mortgage Escrow Act controls lenders' conduct with respect to escrow accounts and the information the lenders provide to their mortgage customers about such accounts. The Act requires that the lender inform the borrower of his rights under the Act in writing at the time of closing. The lender cannot require that the borrower maintain an amount of money in the account that is greater than 150% of the prior year's assessed real property tax, except in the first year of the mortgage. When the mortgage is reduced to 65% of its original amount by the borrower's timely payments under the loan, the lender must notify the borrower that he has the option to terminate the escrow account. A lender's failure to comply with the Act entitles the borrower to bring a lawsuit for monetary damages.

Under the Act, a borrower may also pledge an interest-bearing time deposit with the mortgage lender that is sufficient to secure the payment of the property taxes. With this method, the borrower satisfies the lender's requirement to secure the payment of property taxes while earning interest on his money. Until recently, mortgage lenders were charging an escrow waiver fee when borrowers elected this method, which in some cases was up to .25% of the loan amount. The Illinois Supreme Court has ruled that mortgage borrowers who elect to make a pledge of an interest-bearing time deposit are not required to pay a fee under the plain language of the Act. Now, you can keep your money and your interest, too.

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