When you sign your name for the mortgage on your home, the most prominent figure that you remember is the monthly payment that you’re expected to shell out. Your payment always includes payments towards your principal and interest. In many cases, it includes prorated monthly payments for the annual amounts that your lender expects to pay for real estate taxes, property insurance and other fees on your behalf.
Lender Initial Escrow Calculation
Your lender holds part of your monthly payment in your escrow account and pays the required amount when your taxes and insurance are due each year. Until they have an account history on which they can base annual costs for your mortgage, your lender estimates your monthly contribution toward your potential taxes and insurance using an escrow calculator with cushioning. The lender must provide you with an initial escrow analysis within 45 days after you open the escrow account for your property.
If your original lender assigns your account to a mortgage servicer, your payments to the mortgage servicer stay the same. The servicer must also conduct an annual escrow analysis. Then they let you know if your escrow payments will increase, decrease or remain the same for the next year. Although the calendar year is common, some lenders and servicers might use a different 12-month period.
When you have no mortgage or your lender does not require you to have an escrow account, you can handle these costs yourself.
Calculate Your Monthly Escrow Payment
If you’re fortunate, your lender or servicer provides a detailed monthly statement that shows the amount of your total monthly payment that goes into your escrow account. If so, you can multiply your total monthly escrow amount by 12 to calculate what your lender or servicer expects to pay on your behalf from escrow.
However, your monthly mortgage statement might not have these details even when you’re paying into your escrow account each month. You use an escrow analysis calculator to estimate your total annual escrow contributions and distributions.
Combine the annual cost of your property insurance and your real estate taxes. Divide this total by 12 to find your monthly estimated escrow payments. Take note of the date these two payments are due, to see if you’ll have a surplus or shortage in the escrow account at the end of the year.
Escrow Account Shortages
A federal law, the Real Estate Settlement Procedures Act, or RESPA, requires mortgage servicers and lenders to provide borrowers with an annual escrow statement. Your statement shows how much you paid into your account and how much your lender paid out on your behalf. When you have more expenditures from this account than expected, you have an escrow shortage. Common causes for escrow account shortages include higher property taxes or increased property insurance premiums.
Overpayments For Escrow Accounts
Your lender or mortgage servicer estimates the amount needed to fund your escrow account annually. Their estimate usually includes a small cushion to cover unexpected events that affect future disbursements. Your servicer must inform you if you have an escrow overpayment of $50 or more.
You can choose to accept a refund for an escrow overpayment or leave the overpayment in your escrow account. You can proactively request a refund if you input your actual escrow expenditures into your escrow analysis calculator and find an overpayment of at least $50. RESPA regulations allow your mortgage servicer to have a cushion for your escrow account. Although you may be eligible for a refund, they can hold up to one-sixth of their estimated annual escrow payables.
Carol Luther has published feature articles in print magazines, ghostwritten blogs, and produced digital content since 2007. She has published personal finance and small business articles for the Houston Chronicle, Mahalo, the Nest, USA Today, Wahm, and Zacks. Carol has designed, implemented and managed multi-year, multimillion-dollar domestic and international projects services for higher education, nonprofits, and small to medium businesses for more than 20 years.