In short, escrow is an account you make payments to each month that is managed by your mortgage servicer and used to make payments on your property and school taxes and homeowners insurance. Your escrow account is separate from your mortgage, but payments are typically collected in equal amounts each month as part of your overall mortgage payment. Though escrow accounts are common, you may find yourself asking a lot of questions about them. To help gain a better understanding of what to expect, here are some answered questions about escrow.
What are the Benefits?
- Distribution: Your escrow account allocates your costs throughout the year in monthly payments. By not using escrow, you may need to come up with a large sum (typically once or twice a year) when your taxes and insurance payments are due.
- Convenience: Escrow helps to manage your bills for you. Instead of having to keep track of multiple payments at different times for your property taxes, school taxes, homeowners insurance, and HOA, your mortgage servicer does it for you.
- No late fees: You don’t have to worry about missed or late payments, because your lender takes care of making these payments by their due dates. It’s one less thing you have to worry about.
How is My Escrow Calculated?Your escrow account is unique to you. So how does what you owe get determined? Simply, it’s the amount you owe for your property and school taxes and homeowners insurance for the year, divided by 12. That number is then added to your monthly mortgage payment. You can find a detailed explanation and information on calculations and limits at Bizfluent.com.
Keep in mind, you’ll need to have the money at closing to fund the escrow. This total could vary, depending on the month you close and when your taxes are due.
What is an Escrow Cushion?A escrow cushion are funds that the servicer requires a borrower to keep in the escrow account to cover disbursements that are either unanticipated or made before the borrower’s payments are available in the escrow account. Federal law caps the cushion at 1/6 of your total escrow charges.
What does an Escrow Analysis Do?An escrow analysis is an annual review of the amount of funds held in your escrow account to ensure the correct amount is being withdrawn. This analysis also determines if the borrower needs to pay money to make up a shortage or if the lender has collected too much money, which entitles the borrower to a refund. This analysis is required under the Real Estate Settlement Procedures Act (RESPA).
Why Did My Escrow Payment Increase?
The most common reason for an increase in your payment is due to the increase of property and/or school taxes. As taxes go up, your escrow payment will go up. Homeowner’s insurance fees can rise as well, but typically the increase is minimal. Keep in mind, your escrow payment can decrease as well. This usually is because your property value went down, resulting in a lower tax assessment and lower escrow payment.
You can consult your local tax authorities to review your taxable amount and discuss any inconsistencies. Find out if you qualify for exemptions.
Have additional questions about escrow accounts? A ditech Home Loan Specialist can provide you with more information. Contact a Home Loan Specialist now.