Resident's Guide to Buying a Home and Using the Doctor's Loan
What are Reserve Payments?
We now understand that the bank loans you money to make a profit, not because they are nice people. You and your new home are essentially an investment for the bank. However they are going to ensure that they take the necessary precautions to preserve that investment. If you default on your loan, the bank wants to do whatever it can to recoup as much money as possible. However, if you have not paid your taxes the house is actually under the control of the government until those property taxes are paid. In addition, if you have no insurance on your home and something happens to it, the bank has just lost its collateral. Therefore, the banks set up an escrow account for your property taxes and your homeowner's insurance. An escrow account is where money is held by a neutral third party in order to be used to fulfill a future obligation. The way it works is that your property tax and property insurance bills are typically sent directly to your lender. Both of those bills are paid annually, but most lenders require you to pay 1/12th of the annual bill each month. The lender deposits the partial payments in an escrow account where they'll accumulate until it's time to pay your taxes and insurance the following year. So, although you may pay a certain mortgage payment each month, the monthly cost of insurance and property tax will also be added into that monthly payment.
Written by: Randon T. Hall & Ben Rosenbaum, Copyright © 2008