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Understanding escrow accounts
What is an escrow account?
Think of an escrow account as a savings account for your property taxes and insurance. Some lenders require borrowers to set aside funds in an escrow account to ensure that you’ll have funds to pay the expenses like property taxes, home owners insurance and private mortgage insurance (PMI).
Typically, an escrow account is set up at the time your loan was originated. The property taxes, home owner’s insurance and private mortgage insurance is included in your monthly payment. The lender will pay these expenses unless you decide to not escrow and pay them yourself.
How are escrow payments determined?
The lender will review tax records or related documents to establish the amount you’ll owe for property taxes, homeowners insurance, PMI and any other items paid through escrow over the next 12 months.
The amount is divided by 12 months then added into your monthly principal and interest payment. A minimum escrow balance must be maintained always in case the amounts change during the year. This will assist with any impact that could arise from potential increases. The minimum balance in your escrow account may be equal up to two months of escrow payments. Your lender may require a cushion that cannot exceed two months of escrow payments for the year.
What is a yearly escrow analysis?
Typically, a yearly escrow analysis is provided by your servicer. This information is provided to keep you informed of any changes to your payment and escrow account. The statement provides information regarding your current payment, account history, new monthly mortgage payment, escrow activity over the next 12 months, escrow payments over the next 12 months.
What happens if you have a surplus or shortage in your escrow account?
Your loan servicer will notify you via yearly statement if you have a surplus or shortage in your escrow account. If you have a shortage in your escrows, the servicer will give you a “shortage coupon” to send the shortage amount to pay the shortage amount. The other alternative is the servicer will increase your monthly mortgage payment over the next 12 months to recoup the cost.
In the event you have overpaid into your escrow account, you may receive an escrow surplus check. Lenders are required to return any surpluses over $50.
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