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Aug 2016

8 Important Questions About Escrow Answered

During the mortgage loan process, you may hear the word “escrow” tossed around a couple of times. “Your offer was accepted! Congratulations! You’re in escrow,” your real estate agent may exclaim. Then, when your loan officer discusses mortgage payments, they’ll tell you that your future mortgage payment includes principal, interest, and escrow.

1. What does it mean to be "in escrow?"

When you’re “in escrow,” this means that the purchase of your home is now going to be handled by a closing agent or settlement agent, oftentimes referred to as an escrow company or escrow agent.

The word “escrow” means to put something in the care of another. In this case, you’re putting the details related to your closing in the hands of a professional who specializes in that.

2. What's an escrow account?

Now, let’s talk about the escrow account for your mortgage payment. Your tax and insurance bills usually have quarterly, annual or semi-annual due dates. Instead of remembering to save money on your own to pay them when due, you can pay a portion of the annual cost each month with your mortgage payment. In most cases, your lender will have a servicing company who handles all of the aspects of your mortgage payment, including your escrow account.

3. How's escrow calculated?

The annual cost of your taxes and insurance are divided each into 12 equal installments. Those installments are added to the principal and interest portion of your payment to make up your total monthly payment. As the servicer receives your mortgage payments, they place the funds intended for taxes and insurance into a special account called the escrow account and hold the funds there until they need them. Then, they pull funds from the account and send payments to your taxing authorities and your insurance company as needed throughout the year.

4. What if there isn't enough money in your escrow account for bills?

Even if there is not enough money in your escrow account when it’s time to pay the bill, the servicer will still advance the funds on your behalf and replenish the account as you continue to make your monthly mortgage payments.

5. Will the escrow payment stay the same each year?

Each year, your escrow account is analyzed and compared to new bills received for the upcoming year. If you’ve overpaid for the past 12 months, you’ll receive a check for the overage. If your servicer paid out more for taxes and insurance than you paid into your escrow account for the year, then you’ll have a shortage. That amount is divided by 12, and your mortgage payment will increase for the next year by that amount. The reason for this could be that your taxes and/or your insurance premium went up during the year and your servicer paid more than what was initially anticipated as being needed for your bills.

6. Wasn't there some sort of escrow cushion paid at closing?

Possibly. A cushion is usually two-months’ worth of escrow that’s deposited into your escrow account at closing and then is required to be there each year. Your servicer includes the cushion in your annual escrow analysis to make sure you have enough money in escrow. State and federal law determines whether or not you are required to have a cushion in your escrow account.

7. How will you know if your escrow is changing?

You should be receiving copies of your tax and insurance bills, that can be compared to the previous year’s, to see if there were any changes.

Your lender is required by law to send you a letter each year explaining how they arrived at any changes to your escrow account.

You’ll receive that letter in advance of the changes so that you can be prepared to adjust your monthly mortgage payment accordingly.

8. How can you keep your payments from going up if there's shortage?

The letter you receive from your lender will tell you what your shortage was and give you the option of paying it in full to keep from having the shortage divided and added to future payments. Escrow accounts help you budget your tax and insurance bills and make paying those bills easier. Rarely do taxes and insurance stay the same so you can expect some sort of fluctuation in the escrow portion of your mortgage payment each year.