So whether you’re a long-time homeowner who still has no idea what you’re doing with your escrow account, or if you’re a first-time homebuyer who’s intimidated by it – you’re at the right place. I’m here to help you understand your escrow account.
What’s an escrow account?
The easiest way to think of an escrow account is as a savings account that is managed by your mortgage servicer. A portion of each mortgage payment you make is deposited into this account to cover your estimated real estate taxes and insurance premiums. It’s that simple.
How does an escrow account work?
Your mortgage servicer uses the money in the escrow account to make payments on your behalf for the taxes and insurance required under the terms of your loan. When the taxes and insurance premiums are due, they are paid directly by the mortgage servicer. The biggest benefit of an escrow account is that you can guarantee your bills will be paid in full and on time, without having to budget for a large payment separately.
How are your escrow payments determined?
Your mortgage servicer will estimate the amount that will have to be paid for your real estate tax and homeowners insurance bills. This estimate is based on information provided during closing, through the taxing authority and insurance company, or previous tax and insurance bills.
The estimated payment is then divided by 12 to determine the amount of the monthly payment, and that amount is added to your monthly mortgage statement.
Aside from taxes and insurance, what other bills are paid from an escrow account?
Your escrow account covers real estate taxes and insurance premiums like homeowners insurance and flood insurance. Escrow accounts do not pay things like homeowner association fees, personal property insurance, special or added tax assessments, or other fees.
What are the minimum balance requirements?
The Real Estate Settlement Procedures Act (RESPA) limits the amount to one-sixth of the total amount of items paid from the account, or approximately two months’ worth of payments. This minimum balance helps guarantee that if your taxes or insurance payments increase, you’ll be covered without facing a large and expensive shortage. Your account will be analyzed yearly to ensure you’re paying what you should – not less and not more than necessary. Once the analysis has been completed, any excess funds will be returned to you.
What’s an escrow analysis?
As I mentioned, every year your mortgage servicer will analyze and review your account to make sure you’re paying the correct amount into your escrow account in order to maintain the minimum required balance. Increases or decreases in your annual tax or insurance bills may cause your monthly mortgage payment amount to change. If that’s the case, your mortgage servicer will provide you with a surplus or shortage statement to explain how this will affect your monthly mortgage payment.
Why have your taxes/insurance premiums gone down but not your payment?
Your escrow payment will only be adjusted during your yearly escrow analysis. If you want to adjust your payments sooner, contact your mortgage servicer.
What’s a shortage? What’s a surplus?
If the amount paid toward taxes and insurance was higher than expected, your account may have a shortage. That means you were paying toward an amount that was estimated too low. You were not paying enough into your escrow account to cover the actual cost of the bills. You‘ll be responsible for making up the shortage in your account and your monthly mortgage payment may rise as a result.
Typically you can pay the escrow account shortage in one of two ways:
- Make a one-time payment of the full amount.
- Pay the amount over 12 months by adding the extra amount to your regular monthly mortgage payment.
If the total amount of the bills was lower than expected, your account may have a surplus. This means you were paying more than what you should have and now you have extra money in your account. Great news, right?
Do you have to have an escrow account?
It’s the lender’s decision whether or not an escrow account is required. It’s not something that is regulated by the federal government or RESPA. However, many lenders require escrow accounts for government-backed loans like VA or FHA loans.
This is just a high-level overview of escrow accounts. Your mortgage servicer may have more detailed information that could help you gain a deeper understanding of your specific account information. Each servicer has its own way of approaching things like the escrow analysis statement, or how to make a payment if you have a shortage. But really, when it comes down to it, as long as you understand the basics I’ve covered here, you’ll be good to go on understanding how your escrow account works!
To learn more, speak with a home loan expert today!
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