What You Need To Know About Escrow

What You Need To Know About Escrow

Escrow accounts sound complicated and often are confusing. The amount of your monthly mortgage payment can change based on your escrow analysis so it’s important as a homeowner to understand what it is and what you need to know about escrow shortages and overages.

What is an Escrow Account?

Most homeowners have their escrow account linked to their mortgage payments. The account is basically money set-aside by the mortgage company to pay for homeowner’s insurance, real estate and property taxes. The mortgage company manages the account and uses the funds to make sure that taxes and insurance bills are paid. Some people mistakenly think that it’s something they control themselves but as previously stated, the mortgage company is the one who manages the money for your escrow account. To make things easier, the mortgage company adds the money they need for escrow into your monthly mortgage payment.

Here’s where things can get confusing. Property taxes and homeowner’s insurance can and will fluctuate. When this happens there is either an escrow shortage or overage in the escrow account.

What You Need to Know About an Escrow Shortage

When your property taxes or homeowner’s insurance goes up, it can cause a shortage in your escrow account. That means the mortgage company doesn’t have sufficient funds to pay the additional cost of either property taxes or homeowner’s insurance (or both). To handle this situation, they typically allow you to either pay one lump sum to make up the difference or they allow you to choose to have a higher monthly payment to account for the needed funds. Either way you’re spending more money than you previously have budgeted.

Here are a few tips on how to prepare for an escrow shortage

  1. Property Value: Pay attention to any information your city sends about changes in property value or assessment. If you notice that property taxes or going up in your area it might be a good idea to start saving for a change in your monthly mortgage.
  2. Insurance Premiums: Pay attention to your monthly homeowner’s insurance premiums. It’s important to be aware that not all insurance companies charge the same premiums and you have the right to shop around after you close on your home. Additionally, if you notice that your homeowner’s insurance has gone up, contact your agent or insurance company and ask for clarification.
  3. Savings Account: It’s a good idea to start a savings account, or add to the one you currently maintain, to save money in the event your escrow account has a shortage.

What Happens if I Have an Escrow Overage?

An escrow overage is when you’ve paid too much into escrow. This can happen because your mortgage company overestimated how much money they would need to cover taxes and insurance payments. When this happens the mortgage company will send you an overage check.

If you do end up getting a check from the lender because of an escrow overage, it’s a good practice to deposit the money directly into your savings so it will be there if you end up in an escrow shortage situation.