Your mortgage payment includes more than the principal and interest. Many lenders also collect money for property taxes and homeowner’s insurance, which they place in an escrow account. Escrow accounts provide benefits for both you and the lender. Since property taxes and insurance premiums are typically due once or twice a year, putting a portion of the amount due aside each month means you don’t have a surprise come tax time. The account offers the lender some protection, too, as a borrower is less likely to skip paying taxes when one is in place. Although you’d hope that the amount you have to contribute to the account would remain constant from year to year, it can be subject to some fluctuation, based on a number of factors.
What affects the account
Generally, three things can affect the amount you need to pay towards escrow. One of the more common reasons for a change in the amount you pay is a change in your property tax rate. Taxes might increase in the area you live, due to a change in laws or an increase in your home’s value. Taxes can also drop if your home and property decrease in value.
The amount you need to contribute to the account can also change if your homeowner’s insurance premiums increase or if the insurance company charges you an additional fee. You can also see a change in the amount you need to contribute to the escrow account if there was a mistake in the initial calculation when you got the mortgage.
Escrow analysis
Even if you know that your property taxes have gone up (or down), you might not see the impact of the change right away. Typically, lenders perform a yearly escrow analysis, to see if they have been charging you the correct amount. If the lender hasn’t been collecting enough each month, you’ll have a shortage, which you’ll have to make up. The size of your escrow payment will then most likely increase.
If your lender has been charging you too much, you’ll have an overage. The lender can refund the amount of the overage or it can apply it to your next escrow payment. Usually, if there’s an overage, the lender will adjust your monthly escrow payment down.
Do you need escrow?
Whether you’re required to have an escrow account depends on the mortgage you have. Some mortgage programs, such as the Federal Housing Administration and Veterans Administration programs, require escrow accounts, since the borrower has put down less than 20 percent of the home’s value. Usually, you’ll need to have paid off at least 20 percent of the loan before your lender will let you waive escrow.
Waiving escrow means that you’ll have to pay property taxes and insurance premiums on your own. The amounts can still fluctuate, but you’ll see the changes in one lump sum, rather than in a series of monthly payments.
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