An escrow account is used to simplify the collection and payment of real estate-related items. Your lender computes the amount needed to pay escrow items each year and after changes to your payable items occur. Your annual escrow statement should reflect a low point. The escrow low point denotes the lowest projected balance in your escrow account for the annual review period.
Escrow accounts can provide homeowners with a more manageable method for paying annual hazard insurance premiums and property taxes. Generally, escrow accounts are established when a borrower obtains a loan or refinances a home. Most lenders mandate the formation of an escrow account if a borrower’s loan-to-value exceeds 80 percent of the appraised property value. Your lender may set up an escrow account at your request, if you buy a home using a down payment that’s greater than 20 percent.
The initial establishment of an escrow account could require an amount that represents several months of escrow payments. The amount needed largely depends on the due dates for escrowed items and the date of your loan settlement. A closer settlement date to the escrow payment date could result in a larger amount needed to fund your escrow account. Many lenders request additional reserve amounts to help avoid escrow low points. A two-month cushion is often desired to compensate for changes in escrow billing amounts. After settlement, your future escrow payments are made concurrently with your monthly principal and interest payment.
Escrowed items such as your hazard insurance premium and property taxes get paid on their respective due dates. During the establishment of your escrow account, the payee, the amount and due dates are noted for each item. Most escrow items are paid annually; however, some items are paid semi-annually. A loan servicer could exceed an escrow low point, if the amount needed to pay escrow items becomes insufficient.
Mortgage lenders generally provide an annual escrow account statement. The escrow statement is an analysis of your escrow balance, projected payments and your scheduled escrow distributions. If the statement reflects a shortage to fulfill your escrow obligations, your lender will adjust the monthly amount of your escrow contributions to avoid exceeding the escrow low point. You can speak with your lender about your escrow account.
Ray Cole has written professionally since 1999 and has designed dozens of Web sites. Cole writes for eHow and "SF Gate." As a small business owner for over 15 years, he provides mortgage services, credit-related help and financial planning for his clients. Cole is currently writing a book about personal finance. He has also studied and taught martial arts for over 31 years.