I started to begin this post by explaining what escrow is, but that seemed too sudden. So I backed it up to see where the word came from – it’s always been one of those words that sounds really strange to me. Apparently, escrow comes from a combination of turn-of-the-17th-century Anglo-French and Old French and maybe Old High German words for scrap or scroll. These scraps of scrolls were usually contracts or deeds that were given to a third party for safe keeping.
Fast forwarding to 21st-century mortgages, an escrow is money your mortgage lender puts into a separate account to pay your future property taxes and insurance costs. It’s common to have an escrow account with your mortgage, but it’s not always required. Our escrow team put together some of the common questions (and answers!) they receive about escrow, and I’m sharing them here to help clarify the muddy waters of escrow for you.
How Do I Know If I Have an Escrow Account?
Your banker or loan officer would have discussed the escrow account with you as you were going through the loan process. Also, once you close your loan, your monthly billing statement shows how much of the money you paid went to your escrow account, and you get a yearly escrow analysis showing the details of the account – we’ll talk more about this below.
What’s the Benefit of Having an Escrow Account?
Why should someone else manage your money for you? Isn’t it easier to just do it yourself? Well, if you have an escrow account, whoever manages the account will be estimating the amount of taxes and insurance you’ll have to pay, and they’ll break that money down into manageable chunks rolled into your monthly mortgage payment.
How Is Escrow Calculated?
So it makes sense to have an escrow account, but how do they know how much money you have to pay into it? All of your insurance and tax payments that will be made over the next 12 months are added together and then divided by 12, and that number is added to your monthly mortgage payment so you only have one payment that you have to make each month.
The U.S. Department of Housing and Urban Development (HUD) explains this in much more detail if you want to check it out. Because payment’s due for each item at different times, some months you’ll have a lot of extra money in your account and some months you could actually have a negative balance. To make it more complicated, some types of insurance only have to be paid every three years, which can really mess up your 12-month plan.
To avoid a negative balance, your lender or escrow holder will do a couple things. Usually, they’ll have you put an extra two months of escrow payments, called a cushion, in your account. If, after that cushion, the 12-month forecast shows that you’ll be low one month, your escrow payment will be increased enough so you’ll still have enough money in the account.
What Is an Escrow Analysis?
In the last question, we talked about making sure there’s enough money in your escrow account every month. Performing an escrow analysis is how you do that. This is done once a year, but you can also request to have one done at another time. Sometimes there can be a shortage in your account if your property taxes or your insurance premiums increase. In this case, your monthly payment will go up.
If the analysis finds that you’ve got the right amount of money in the account, sweet! If you have a surplus of more than $50, you’ll get an escrow surplus check sent to you. When the surplus is less than $50, your next payment will be that much less. There are a few reasons a surplus can happen. For instance, an escrow item being dropped from your account, like an insurance policy or a tax exemption, could result in a surplus.
Having this scrap of scroll doesn’t have to be complicated or scary once you break it down a bit – you could actually get money back from it! Probably best not to hold your breath, though, just in case. Did we answer all of your questions here? What other escrow stuff are you wondering about?