Explaining Escrow Accounts
WHAT IS AN ESCROW ACCOUNT?
It is an account established on your behalf by your mortgage lender. It is set up to pay your real estate taxes, homeowners insurance, and if applicable, mortgage insurance. A portion of these funds is collected with each monthly mortgage payment and is deposited in your escrow account. This ensures your bills are paid in full and on time, without you having to save large amounts of money and keep track of due dates.
CAN THE MONTHLY ESCROW AMOUNT CHANGE?
An increase or decrease in your annual taxes or home insurance premiums can cause your monthly escrow amount to change. Each year your mortgage lender will analyze your account to make sure the escrow portion of your monthly mortgage payment will cover your projected real estate taxes and homeowner's insurance premiums. After each escrow analysis you should receive an account disclosure statement, which will show the changes to your account and your new monthly mortgage payment.
HOW IS THE MONTHLY ESCROW AMOUNT DETERMINED?
Your lender will calculate the amount they will have to pay over the next 12 months for your real estate tax, homeowner's insurance, and, if applicable, mortgage insurance premiums. They base these amounts on information from your loan closing documents, your taxing authority and insurance company, or your previous tax and insurance bills. They then divide the estimated amount by 12, and add the result to your monthly mortgage payment.