Escrow has a few different meanings in the world of real estate. Home buyers typically deposit "earnest money" into an escrow account while hashing out the terms of a new home purchase with the seller. An escrow payment usually refers a second type of escrow account, which goes into action once a home purchase is complete and you start paying the mortgage.
Additional Monthly Costs
Homeowners' housing costs extend beyond the mortgage payment. Property taxes and homeowners insurance also must be paid on a regular basis. Although these aren't part of your mortgage balance, your lender may establish a separate account, known as an escrow impounds, to collect and pay these expenses. You make 12 escrow payments into the account every year to ensure there's enough money to cover taxes and insurance when these bills become due.
Optional and Mandatory Escrow Accounts
Homeowners who obtain a mortgage with a down payment lower than 20 percent, or have less than 20 percent equity after a refinance, may have to establish an escrow account with the lender. Escrow payments usually are required until the loan is either repaid in full or the home appreciates sufficiently. Lenders will cancel mandatory escrow payments when you have 20 percent to 22 percent equity in the home.
Owners who have sufficient equity still may opt for an escrow account to facilitate payments. Rather than maintain a separate bank account and allocate funds each month to ensure you have enough for taxes and insurance when due, you can send escrow payments to the lender each month along with the mortgage.
Escrow Payments Can Change
Your escrow payments can fluctuate from year-to-year for the following reasons:
- Change in homeowners insurance premium
- Change in local property tax rates
- Change in your home's assessed value by the local tax authority
- Change to the amount of cushion, or escrow reserve, required by your lender
- Underpaying or overpaying into the account
You may have to pay more or less than the previous year's monthly installment if the expenses change. For example, if you underpaid on the account at any time throughout the year, you may end up with a shortfall. The lender can charge you more in monthly installments to replenish the escrow account, or you can pay a lump sum to eliminate the shortage.
Your lender must refund an escrow account overage, or surplus, for amounts of $50 or more via a refund check. The lender must send a check of $50 or more to you no later than 30 days after analyzing the account. Lenders can apply a surplus of less than $50 to your future payments, thus reducing them slightly.
Federal law prohibits lenders from maintaining more than two months of reserves in an escrow account.
Lenders Calculate New Escrow Payments Annually
By law, homeowners receive an annual summary of their escrow account. The escrow analysis statement shows amounts collected and disbursed from the account for a set period. In addition to billing and disbursement history, the statement also reflects projected expenses for the coming year. Carefully review your annual statement for accuracy and to determine whether you owe the lender for a shortfall or the lender owes you for an overage. If you find that you are entitled to an overage refund, but the check's not included with the statement, contact the lender to ensure your receive it within 30 days of the statement.
Estimate Your Escrow Payments
Suppose your homeowners insurance premium for the upcoming year is $952. Also, suppose your upcoming annual property tax bill is $2,089. You can calculate your monthly installment payments for these bills by adding them together and dividing by 12 installments:
- $2,089 + $952 = $3,041
- $3,041/12 = $253.42
In this case, therefore, your monthly escrow payments are $253.42.