Escrow Accounts Explained In Detail
This page is an addendum to Escrow Accounts and provides a more in depth explanation of mortgage escrow accounts for purchase home loans in Texas. You may also want to check out our page on Escrow Analysis to learn about the annual escrow re-balancing that takes place after a mortgage is in place.
Three Months of Reserves
For purchase transactions an escrow account contains roughly 3 months of property taxes and 3 months of insurance. The amount collected on the HUD will appear to be higher because of how property taxes are paid in Texas. Property taxes in Texas are typically due in early October and homeowners have until January 31st to pay the bill before considered late. Taxing authorities will only accept one payment for the full amount and the responsibility lies with whoever owns the home at the time the taxes are due. Therefore, when closing on a purchase loan there may be more than 3 months of property taxes collected from the buyer for the escrow account BUT the sellers will reimburse the buyer for their prorated portion of property taxes.
Escrow Taxes Collected When Taxes Are Due
For closings that occur when the property taxes are due (between October 1st and February 1st) the aforementioned information is still true but the numbers may appear differently on the HUD.
Cushion and Reserves
An escrow account does include a cushion (or reserves) to account for any increases in your taxes and insurance that may occur over time. Every year your mortgage servicer will conduct an Escrow Analysis to monitor this cushion and will adjust your monthly payment accordingly to ensure that they will have enough funds in the escrow account to pay for the full property tax bill and annual insurance premium. (Note: your monthly payment will only change as it relates to taxes and insurance; none of the terms of loan such as interest rate, loan amount, etc. can be modified). Escrow accounts are regulated by the government so by law an escrow account is only allowed to contain a certain amount of cushion. Despite the 3 months of taxes and insurance collected at closing, an escrow account typically has about 1 month of “cushion” for both your taxes and insurance.
As previously stated, an escrow account contains a regulated cushion amount. An Aggregate Adjustment is a credit back to the buyer for an amount that is in excess of what’s allowed to be collected. This credit simply reduces the amount collected for the escrow account and is a line item on the HUD.
As always you’re welcome to call us if you have any questions about an escrow account. We’re here to help.
- Escrow Accounts – provides a basic over of escrow accounts
- Escrow Analysis – check out our video on how mortgage servicers do an escrow analysis and what that means to you.
- Prepaids – prepaids are not technical not fees; they are the cost of home ownership. Prepaids are the per diem interest, first year’s homeowners insurance, escrow account, and any per diem HOA dues.