Understanding Mortgage Escrow Accounts

Hello and Happy Friday!  Today, let’s discuss a mortgage escrow account.  If you currently have a mortgage, you may already know what an escrow account is and if you are buying a home right now and have been talking to a mortgage professional, you may be learning about one.  

What is an escrow account?  An escrow account acts as a “savings” account.  This account is set up by your mortgage servicer (the company that handles your mortgage payments).  Not all mortgage companies service or handle the mortgage payments after you obtain a mortgage― a lot of these companies will have a mortgage servicer handle all of this.  The account is set up to pay your real estate property taxes, homeowners insurance, mortgage insurance and homeowner’s association dues.  This allows many people to be able to budget easier. 

How does an escrow account work?:  When you make your monthly mortgage payment a portion of that payment goes to paying the principal and the interest on the loan.  Paying the principal pays down the loan until it is paid in full and the interest is how the bank is making their money―it’s the cost of borrowing the money.  Then the remainder of your monthly payment is your escrow account.  Each month, a deposit is going into that account to ensure that there is enough funds in the account to pay for the bills as they become due.  For example, when the yearly real estate tax bills become due, you forward the bill to the mortgage servicer and the bill is paid from the account.  Most homeowner’s insurance companies will bill the mortgage servicer directly.  

Each year, the mortgage servicer will do what they call an “escrow analysis” of your account.  This is like a check and balance of your account.  It allows them to see what was projected to be paid from the account versus what the bills actually were.  Like most things in life, these bills tend to increase each year so a mortgage servicer will typically allow a cushion for a small increase.  Escrow accounts fall under the federal law called Real Estate Settlement Procedures Act or RESPA.  The RESPA statute allows the mortgage servicer to maintain this cushion but limits the amount of the cushion to approximately two months of escrow payments.  When an escrow analysis is done, they will determine if there is too much in the account and issue you a refund or they will determine if there was any shortage and allow you to pay this in one lump payment or over a twelve month period.  

When is an escrow account required?  Typically any mortgage that has less than 20% down will be required to have an escrow account.  This is a type of protection for the mortgage lender to ensure these lienable items are paid, protecting their collateral.  

There is no cost to you as the consumer for this account and the service of paying these bills from this account.  

I hope that this was informative and helped provide a little information on these accounts, especially for first time homebuyers who may have never heard of this kind of account.  If you have some other questions that you would like to see addressed on this blog about real estate, mortgages, homes, DIY projects, etc, feel free to comment or reach out to me directly and I can see that we discuss your topic of interest.

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