Many banks and other lenders require borrowers to sign up for a mortgage escrow account along with their mortgage. Each month, the borrower pays extra into the account and at the end of the year the lender pays property taxes and insurance using the balance. Most mortgage escrow accounts do not generate interest. If you live in one of 14 states with laws on the subject, your account's interest rate is set by law or the lender, depending on the state.
Only 14 states have laws requiring lenders to give interest on escrow accounts and very few lenders outside of those states offer interest on the accounts. California, Connecticut, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Utah, Vermont and Wisconsin have interest laws as of 2011. If you live in a different state but your lender offers an interest rate, the rate is at the full discretion of the lender.
Payments into the account increase the balance that the interest rate is applied to every month, so you must figure interest monthly. Multiply the balance of the account at the time each month when interest is disbursed (usually the end of the month) by the escrow account's stated interest rate, then divide the product by 12. Add the monthly totals together to get your annual interest payments.
Iowa, Maryland and Vermont require lenders to pay the same interest that they offer on savings. New Hampshire and Wisconsin establish an average savings account rate and require lenders to pay that rate on escrow accounts. Maine requires the interest to accrue at no less than 50 percent of the yield on a one year Treasury note, while Oregon requires a rate not less than the yield on a 91-day Treasury bill. California and New York have a set 2 percent rate, Connecticut changes the rate yearly but it can never be less than 1.5 percent, Minnesota requires 3 percent, Rhode Island a whopping 4 percent and Utah requires 5.5 percent with some exceptions and alternatives. Massachusetts requires interest but lets the lender determine the rate.
Every state law has at least one exception and a number of conditions. Most of the 14 states exempt escrow accounts that a borrower opened before the state passed the law requiring interest payments on such accounts. Refer to the summary of state laws in the Resource section of this article or consult with an experienced real estate lawyer in your state.
- The Finance Buff: Does a Mortgage Escrow Account Pay Interest?
- Joseph Lucas and Associates: Real Estate -- Mortgage Escrow Accounts
- The Mortgage Professor's Website: Advantages and Disadvantages of Mortgage Escrow Accounts; Jack Guttentag; November 2008
- Michigan.gov: Consumer Information -- Mortgage Escrow Accounts
Calla Hummel is a doctoral student studying contraband in international political economy. She supplements her student stipend by writing about personal finance and working as a consultant, as well as hoping that her investments will pan out.