Question 21

A lender may add 1/12th of the estimated cost of the annual property taxes and hazard insurance on the mortgaged property to the monthly loan payment for deposit in an impound, escrow, or reserve account.

This practice is commonly referred to as creating an escrow account, where the lender collects a portion of the annual property taxes and insurance each month, allowing for these expenses to be paid when they come due.

A) a PMI account.

A PMI (Private Mortgage Insurance) account is specifically used to collect insurance premiums that protect the lender against default. It does not pertain to the collection of property taxes or hazard insurance, making this option incorrect.

B) a margin account.

A margin account is related to investing and borrowing funds to purchase securities, and it has no relevance to real estate transactions or the management of property taxes and insurance. Therefore, this option is also incorrect.

C) an impound, escrow, or reserve account.

This option is correct as it describes the account set up by the lender to collect and hold funds for property taxes and hazard insurance. By adding 1/12th of these costs to the monthly payment, the lender ensures that there are sufficient funds available when these payments are due.

D) an adjustment account.

An adjustment account typically refers to an account used to track adjustments in financial statements or transactions. It does not relate to the collection of property taxes or insurance, thus making this option incorrect.

Conclusion

The correct answer is option C, as it accurately describes the mechanism by which lenders manage property taxes and hazard insurance through an escrow or reserve account. Options A, B, and D fail to address the specific purpose of collecting these fees, confirming that they are not applicable in this context.