Are There Limits to How Escrow Accounts Are Handled?
Federal Law allows institutions which include escrow provisions in their mortgage contracts to collect amounts needed to pay for taxes and insurance, plus one-sixth over the amount. This is important because many institutions do not require the excess amount. The main purpose is to prevent deficiency from occurring in an escrow account as taxes and insurance rise from year to year. The larger collection also helps ensure the institution will be able to make each tax payment when it is due.
Escrow payments are accounted for using a process called the “zero balance” method. It is called a zero balance method because at some point during the year the balance in the escrow account should approach zero.