So, you’ve dreamed about the perfect home, envisioned the perfect paint colors, countertops and cabinets, and you’re getting ready to select your manufactured home lender. You’ve done your research and looked at terms and rates. You’re trying to choose between your two or three top lenders, but then you come across the term “mortgage escrow.”
Mortgage escrow is one of the more confusing topics when it comes to home investment. We have broken down commonly asked questions about mortgage escrow so you can be informed as you choose a lender and as you embark on the journey of homeownership.
What is an escrow account?
Mortgage escrow is a process where additional funds are collected with your mortgage payments to pay other expenses associated with homeownership. The additional money is set aside by your mortgage servicer and used to pay property taxes, home insurance premiums, and flood insurance premiums if you have it, so you don’t have to scramble to pay a large tax bill or insurance premium all at once later on.
Why am I required to have an escrow account?
Having a mortgage escrow account, sometimes called an impound account depending on where you live, ensures that there will be enough money to pay property taxes, and home and flood insurance premiums when they are due. This way, you won’t have to save and pay large lump sums all at once. Since taxes and insurance payments are being collected every month by your mortgage servicer in addition to your loan payment, all the work will already be done for you! The payments are made directly by your mortgage servicer when the payment is due.
However, not all lenders will require escrow accounts for each customer. Talk to the lender you choose to see if they require escrow accounts.
Different lenders may have different guidelines and regulations concerning mortgage escrow, so be sure to ask about mortgage escrow when searching for the perfect lender for you. If your loan doesn’t include an escrow account, you will have to plan to pay these expenses yourself.
How is escrow determined?
To determine your escrow amount, your lender or mortgage servicer will add your annual property tax and insurance premium amounts together and divide that number by 12.
The amount that is configured will be the monthly amount you pay to your escrow account for the annual expenses¹. The calculation would be different if you choose a lender with a different payment frequency (like bi-monthly).
How are escrow accounts managed?
The amount in your escrow account can vary during the year as payments are made and because of tax assessment and insurance premium adjustments. Lenders will typically cover any shortfalls until they can adjust your monthly payment to make up for tax and insurance premium increases, but be sure to ask you lender how they handle escrow shortfall situations.
Keep in mind that your monthly escrow payment may fluctuate from year to year based on tax and insurance premium fluctuations. Talk to the lender you chose about how your escrow will be managed².
What’s a minimum balance on an escrow account?
A minimum balance on an escrow account is a specified minimum amount you will need to keep in your account to be sure there will be enough money, in case there are increases in taxes or insurance premiums.
There is also a limit on how much your mortgage lender can make you keep as a minimum balance and pay each month for escrow. Before your loan closes, the lender you chose will estimate the total amount of your annual expenses to determine your escrow minimum balance³.
Your lender may require you to pay as much as one-sixth of the total annual taxes and insurance premiums each month, but that is the maximum amount they can ask you to pay.⁴
What is an escrow review?
An escrow review or an escrow analysis is when your lender or mortgage servicer reviews your escrow account after 12 months and compares the account to your current bills for taxes and insurance. This helps identify if your escrow account matches the bills or if you have a shortage or surplus⁵.
A shortage in your escrow account is when you don’t have enough funds in escrow because of an increase in taxes or insurance premiums. If you have a shortage, you will be responsible for paying the difference of the funds needed to cover taxes and insurance. However, you will have the choice to either pay the entire amount in one sum or to spread it out over the year.
A surplus in your escrow account typically happens if taxes go down or if the original estimate of your payments was high. If you have a surplus, your lender or mortgage servicer may pay the appropriate amount to cover taxes and insurance bills from the money in your escrow account, and you will be refunded the remaining amount⁶.
Where can I find more information about escrow accounts?
If you have questions or concerns about your escrow account, you should contact your lender or mortgage servicer. In some cases, you may need to complete and send an information request⁷.
For easy to read information about an escrow account, visit the Consumer Financial Protection Bureau.