All About Escrow Accounts

Whether you’re a long-time homeowner or a first-time home buyer, understanding an escrow account may be difficult or daunting. To gain a firmer understanding, you must first understand what an escrow account is, how it works, and how it is analyzed.

What is an escrow account?

An escrow account is simply a savings account managed by your mortgage servicer. A portion of each mortgage payment is deposited into this account to cover estimated real estate taxes and insurance premiums. Your mortgage servicer manages the money in the escrow account to make payments on your behalf for the taxes and insurance required under the terms of your loan. Is an escrow account required for all home loans? The lender ultimately makes the decision whether an escrow account is required; however, many lenders require escrow accounts for government-backed loans like VA or FHA loans.

How does an escrow account work?

When going through the mortgage process, your mortgage servicer will put together an estimate for the amount that will pay the bills for your real estate tax and homeowners insurance. This escrow estimate is based on information provided during closing, through the taxing authority and insurance company, or previous tax and insurance bills. The estimated payment is then divided by 12 to determine the amount of the monthly payment, and that amount is tacked on to your monthly mortgage statement. Payments are then made on your behalf by your mortgage servicer as they are due.

What is escrow analysis?

The Real Estate Settlement Procedures Act (RESPA) requires a minimum amount to reside in your escrow account that equates to approximately two months’ worth of payments. This minimum balance guarantees that if your taxes or insurance payments increase, you’ll be covered without facing a large and expensive shortage. Therefore, every year, your account is analyzed to ensure you’re paying the correct amount into your escrow account to maintain this minimum balance. Increases or decreases in your annual tax or insurance bills may cause your monthly mortgage payment amount to change. If that’s the case, your mortgage servicer will provide you with a surplus or shortage statement to explain how this will affect your monthly mortgage payment.