Paycheck Chronicles

Understanding Mortgage Escrow

If you have a mortgage, you probably have a mortgage escrow account.  Depending on your lender and your personal situation, you might not even have a choice about it - having an escrow account is most likely a condition of your mortgage. In my opinion, mortgage escrow accounts are a smart idea, regardless of whether they are mandatory or voluntary. The primary problem with escrow accounts is that they are misunderstood.   If you don't understand how they function, it is easy to get upset with the process.

In my former life, I worked in the servicing department of a mortgage bank. My particular specialty was loss mitigation, which means that I primarily worked with people who were having trouble with their mortgages or facing foreclosure. However, I spent a lot of time answering general phone calls on a variety of subjects. In my experience answering those phone calls, I decided that the single most confusing part of mortgages is escrow accounts.

A mortgage escrow account is a part of a mortgage account that collects money to pay regular bills that are directly attached to the house: usually property taxes and homeowners insurance, sometimes condo association fees, and occasionally random other bills.  It is sort of like a designated savings account, with the deposits coming as part of your regular mortgage payments.  This would be simple and clear if your bills remained the same from year to year, but they don't.  As a result, your escrow payment needs to be adjusted annually.  This is done by an audit called an "escrow analysis."  Each year, your mortgage servicer looks at your escrow account to ensure that your escrow payments are the right amount.  They send you a statement that shows all the escrow deposits and payments for the year, and how they balance, and what your anticipated deposits and payments are for the next year.  At this time, your escrow payment may change and you may even have a shortage or an overage in your escrow account.

Let's say your escrow account pays your homeowner's insurance and your taxes, for a total of $1200 per year.  As a result, your mortgage payment each month is $100 more than the principal and interest due on the loan.  At the end of the year, you've contributed $1200 to your escrow account, and you've paid out $1200 in payments.  Perfect!  When your mortgage servicer does your escrow analysis, they determine that you're paying exactly the right amount into your escrow account each month.

But what happens when your homeowner's insurance goes up by $60?  Suddenly, you've paid in $1200 but you've paid out $1260.  This is obviously not going to work.  There are two different issues here:  your account is $60 short for the previous year, and your account is expected to be $60 short for the upcoming year.

As a result, your payments into your escrow account will increase to $105 each month, bumping up your mortgage payment by $5.  In addition, you will given the choice of paying the $60 balance in full, or making up the shortage by having an increased payment for the following year.  In this case, making up the shortage would add an additional $5 to your mortgage payment, for a total increase of $10 per month.

Of course, your expenses could go down, as has happened with many homeowner's property taxes in the last few years.  However, with the ever increasing cost of homeowner's insurance, few of us have seen our overall mortgage bills decreasing.

I hope this explains escrow and why your mortgage payment can change.  If you have questions, please ask.  I'd love to help!

 

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