Many mortgages require an escrow account into which you pay every month along with your mortgage payment. The escrow account is used to pay your property taxes and home insurance bill when they come due. While your bank has the right to collect some extra money for your escrow account, sometimes it collects too much. By law, the lender has to refund excesses.
Funding Your Escrow
Your lender uses a relatively simple process to calculate your escrow payments. It adds up your projected annual insurance and property tax bills and divides them by 12. That amount is your monthly escrow payment. In addition, when you closed your loan, your lender had you deposit money in your escrow account so that you'd have a cushion. By law, your lender is allowed to keep enough money in your account so that it never drops below two months' worth of payments.
At least once a year, your lender has to analyze your escrow account and ensure that it has enough money, but not too much. The yearly analysis also allows your lender to adjust your escrow payments if your property taxes or your insurance premiums change. If your lender projects that your account will run short, it will either let you pay the shortage in one lump sum or will spread that shortage over 12 months, increasing your monthly payment.
When the lender's analysis shows that you have too much money in your escrow account, they will probably send you a check. If you have less than $50 of surplus funds, the surplus can be applied to your next escrow payment. When you have more than $50 of excess funds, though, your lender will have to send you a check. This can happen if your bank made a mistake and overfunded your account, or if your taxes or insurance premiums either go down or don't go up as fast as your bank expects them to.
While yearly escrow analyses and making extra monthly payments may be inconvenient, you can't just cancel your escrow account on a whim. Many banks require escrow accounts because they can be profitable for them and because they guarantee that, as long as the loan gets paid, the insurance and taxes get paid, too. However, if you pay your loan down and your lender allows it, the bank may let you cancel your escrow. Generally, you'll have to owe less than 80 percent of your loan's value and you may have to pay a fee to cancel the escrow account.
- State Financial Network, Inc.: FAQs -- Escrow
- The Mortgage Professor: How Do I Figure Escrows?
- Wells Fargo: Understand Your Escrow Account
- The Mortgage Professor: How Can I Avoid Escrows on My Mortgage?
- Cornell Law School. "Escrow." Accessed March 15, 2020.
- Los Angeles County Consumer and Business Affairs. "Escrow." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "What Is an Escrow or Impound Account?" Accessed March 15, 2020.
- The People's Law Library of Maryland. "Rent Escrow: When the Landlord Fails to Make Repairs." Accessed March 15, 2020.
- California Department of Business Oversight. "Online Escrow Fraud Questions and Answers." Accessed March 15, 2020.
- Consumer Financial Protection Bureau. "Mortgages Key Terms." Accessed March 15, 2020.
- FindLaw. "Connecticut Security Deposit Laws." Accessed March 15, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.