Learn more about your escrow account, how your escrow payment is calculated and why an escrow analysis is performed on your mortgage account each year. Let us break it down for you in our video below.
An escrow account (also referred to as impound or trust account) is an account for paying your property taxes and insurance premiums and for any other charges.
An estimated amount, based on the previous year’s payments and an adjustment for inflation, is divided by 12 and added to your mortgage payment.
Your monthly escrow payment could change. If your property tax payment or insurance premiums change then your escrow payment will also change.
An escrow cushion (also referred to as a reserve or target balance) is collected to cover any unanticipated disbursements or payment increases. The cushion amount may be 0-2 months of escrow payments based on federal and state guidelines and your loan documents.
An escrow analysis is a review of the escrow deposits and expenses for the previous year and the projected activity for the next year. Your account is analyzed yearly to make sure the correct amount is collected to cover your property taxes and insurance premiums, and the cushion.
An escrow analysis is conducted to project deposits and expenses for the next 12 months. If at any time your projected escrow balance is less than the allowable cushion then a shortage will exist. If at any time the projected escrow balance is greater than the allowable cushion then a surplus will exist.
If a shortage exists, the shortage amount is typically spread over 12 months and is added to the projected monthly escrow payment. If you choose to pay off the total shortage your monthly payment could still increase due to increases in taxes and insurance premiums.
If you have a surplus less than $50.00 the surplus will remain in your escrow account and will be used to decrease your monthly escrow payment. If the surplus is equal to or greater than $50.00 then you will receive a refund check unless your loan is delinquent. In that case, you will be asked to contact Loan Counseling to discuss ways of handling the surplus.
By law, a small reserve (also called a cushion) may be collected to cover any unexpected changes in escrow payments. The cushion may be 0-2 months of escrow payments.
According to RESPA guidelines, a surplus equal to or greater than $50.00 shall be refunded to the borrower.
If you have set up automatic payments through ACH, then the amount taken from your account will be adjusted to cover any decrease or increase starting on the effective date of the new payment. If you have set up automatic payments through your financial institution’s bill pay service, you will have to adjust future payments to the new amount due.