If you purchased a home or property by getting a loan, you most likely have an escrow account. An escrow account is established by your lender to hold money to pay for your homeowners insurance, mortgage insurance, and property taxes. Each month, when you make your mortgage payment, you are paying an additional amount to be held in your escrow account. When your insurance premium is due, your lender makes that yearly payment out of this account. When your property taxes are due every April and October, your lender makes those payments. Enough needs to be collected every month in order to maintain a sufficient balance to cover these expenses.
There is a “cushion” built in to make sure there is a required amount remaining in your escrow account after all of the payments are made. This cushion cannot exceed one-sixth of the amount needed to pay for those items. This is to offset any increases in insurance premiums or property taxes.
With changes in insurance premiums and property taxes, there can be shortages or overages in your escrow account. A shortage occurs when there is not enough being collected each month to cover the charges due to increased costs for these items. When there is a shortage, your mortgage payment will most likely go up to cover it, or in some cases, you can pay an additional lump sum to make up the difference.
An overage occurs when your insurance premiums or property taxes have gone down and your escrow account has more money in it than is needed to cover these items. Depending on how much the overage is, your monthly mortgage payment may be adjusted, or if it is over $50, you will receive a refund by mail.
Each year, you receive an Annual Escrow Account Disclosure Statement from your lender. This statement shows a breakdown of your escrow account, including what is being paid out of the account, estimated amounts for the next year, shortages or overages, new payment amounts, and account history.
Next time you get one of these statements in the mail, take a few minutes to look it over so you can better understand where that portion of your monthly mortgage payment is going.