Understanding Your Annual Escrow Account Disclosure
Every month, we set aside a certain portion of your mortgage payment into an escrow account. We use the money in this account to pay your real estate taxes and, if applicable, your private mortgage, FHA, flood, or hazard (homeowners) insurance, when they are due. An escrow account disclosure statement (also called an escrow analysis) reviews how much money is in that account to make sure that we are collecting the appropriate amount – not too little and not too much. If there is too little, we will adjust your payment to make up the difference. On the other hand, if there is too much money in the account, we will send you a refund.
The amounts of real estate tax, and, if applicable, insurance amounts based on previous bills for your escrow items (either what we paid last year or, if the loan is new, the information provided at closing) are added together. We then divide them by 12 to figure out how much money you need to pay into your escrow account each month. This amount is added to your monthly principal and interest payment.
- If your taxes and/or insurance in the past year exceed the balance in your escrow account, there will be a shortage. We will determine the shortage, divide it by 12, and add it to your monthly payment.
- If you have more money in the escrow account than you need, because your taxes and/or insurance were less than we estimated last year, we will send you a refund, if it’s $50.00 or more.
Section 10 of the Real Estate Settlement Procedures Act (RESPA) allows lenders to collect and maintain up to one-sixth of your total disbursements in your escrow accounts at all times. The escrow cushion is used to cover increased tax and insurance disbursements. We do not cushion for mortgage insurance or optional products.
We are required to analyze your account at least once every 12 months.
A fixed rate means that your principal and interest payment on your loan will never change, but your monthly mortgage payment also includes an escrow payment for real estate taxes and, if applicable, insurance premiums, which do change periodically. A change in taxes and/or insurance will affect the escrow portion of your total monthly payment.
If your real estate taxes and/or insurance premiums went up since the last time we analyzed your escrow, your escrow account may be short. In other words, your tax and/or insurance bills exceeded the amount put into your escrow account.
To make up the difference, we will divide the total shortage by 12 and add it to each month’s escrow payment over the next 12 months.
It is pretty hard to keep your escrow payment from increasing because taxes generally change each year. So do insurance premiums.
To calculate your escrow payment for the next 12 months, we add up how much your taxes and, if applicable, insurance costs were in the most recent year and divide that amount by 12. If your account falls short, you have the option of paying your shortage amount in one lump sum so you will not have to pay extra each month for the next year. This may not necessarily keep your payments the same from year to year, but it will reduce your new monthly payment amount.
We will send you a refund if:
- your loan is current, and
- the surplus amount is $50 or more.
If your surplus is less than $50, we will spread it over the next 12 months, which will lower your payment slightly.
If you receive a surplus check with this analysis and/or your payment goes down significantly, please check the tax amount that we are using. It is likely that we paid out a small tax amount based on your vacant lot before your house was built. Due to RESPA guidelines, we cannot escrow for more than the last tax amounts we paid, unless you ask us to modify our records.
At some point in the near future, your tax bill will be based on the new assessment of your property, which will include your new house. This means your taxes will noticeably increase and your escrow account will likely fall short. To prevent this, you may instruct us to increase your escrow payment now. Send the surplus check back to us and we will redeposit it into your escrow account.
Please note: If your new rate has not been set, please contact us to reset your escrow at the higher amount, if you so desire.