This article is applicable to homeowners who have a mortgage with an escrow account. Every year mortgage servicers do an escrow analysis on existing escrow accounts. Below, we explain how the escrow analysis works, what the results mean, and how the results affect your monthly repayments.
What Is an Escrow Analysis?
An escrow analysis is an audit, or review, of your escrow account. The audit checks that there’s enough money in the escrow to cover your insurance premiums and tax liabilities. The federal government requires a specific amount of reserves in an escrow account.
Once the analysis is completed, you’ll receive an escrow analysis statement that breaks down the results.
What happens when the results are available? Well, in some cases, you could see mortgage payment increase due to the escrow funds. New construction escrows are the primary reason for unexpected (and dramatic) increases in the monthly payment.
What Is the Escrow Analysis Statement?
Your statement provides an overview of your escrow account. It breaks down what information your provider used to analyze your escrow over the last 12 months. Additionally, it shows your projected escrow transactions for the next 12 months. This lets you see how your payments may be changing.
There should also be a section showing how your existing monthly payments compare to your new monthly payments.
Not sure how to read your annual escrow analysis statement? Your mortgage provider should be able to help.
What Is the Escrow Calculation?
An escrow account calculation determines the amount required to fund an initial escrow account. This establishes a financial cushion that equates to approximately three months of both taxes and insurance payments.
This reserve helps cover costs for future increases in property taxes and homeowners insurance.
When Are Escrow Analysis Done?
How often is escrow analysis done? As noted, your escrow will be analyzed once every 12 months. An annual escrow analysis is normally sufficient. However, your lender or mortgage servicer will explain if you can expect an analysis more frequently.
Escrow Analysis Requirements
If the analysis reveals an issue with your escrow, then you might be entitled to a refund on overpayments. On the other hand, you may be expected to make up any shortfall. This is why you could see your mortgage payments increase.
If you’re unsure how to meet the lender’s requirements after an escrow analysis, contact them to discuss the matter.
What Is an Escrow Adjustment?
The escrow adjustment is the changes your servicer makes to your monthly payments. These changes will be specified in your annual escrow account statement.
Mortgage servicers may adjust the monthly payment once per year based on the results of the escrow analysis. The monthly payment will only change as it relates to taxes and insurance. The servicer cannot modify the loan terms – such as interest rate, loan amount, etc.
The escrow analysis will determine if there is a surplus or shortage in the account. The mortgage servicer will then adjust the monthly payment accordingly.
If your escrow analysis reveals a shortage in funds, then you’ll be expected to cover the shortfall.
Why might a shortage occur, though? The reason is usually simple. An escrow shortage will most likely occur as property taxes and insurance premiums increase over time. These gradual cost increases will slowly deplete the escrow account’s reserves.
Eventually the escrow account won’t have enough funds to pay the taxes or insurance obligations. At this point, there’s now a shortage of escrow funds.
If the escrow analysis shows there are not enough funds available, the servicer normally gives a homeowner two options. They can either write a check to cover the shortage or pay the shortage over a twelve-month period.
Option 1: Write a Check
A homeowner can write a check to the servicer to cover the immediate escrow shortage. Subsequently, the mortgage servicer will increase the monthly payment based on the currently estimated taxes and insurance amounts.
Option 2: Add the Amount to the Monthly Payments
Based on their escrow analysis, a homeowner can elect to add the escrow shortage to the future monthly payments. This means one twelfth (1/12) of the shortage amount will be added to the next twelve payments.
Keep in mind that the mortgage servicer will also increase the payment by the recent escrow increase. The result? The monthly payment increases for two reasons:
- the normal increase in escrow amounts; and
- the new payment plan.
You should think about what option makes the most financial sense to you.
Escrow Analysis Shortage Example
Assume a homeowner’s property taxes increased $1,200 per year and caused an escrow shortage of $600. The homeowner decided not to write a check for the $600. Instead, the homeowner opted to increase the payment by $150 per month.
The first $100 accounts for the permanent $1,200 increase. The next $50 recoups the $600 shortage over a 12 month period.
Assuming the taxes and insurance amount stay the same for the following year, the payment is reduced by $50, since that $600 has been repaid.
While rare, it is possible that an escrow analysis reveals that an escrow account is over funded. When property values, tax rates, or insurance premiums decrease there could be a surplus in an escrow account.
A homeowner is entitled to a refund if there is a surplus in an escrow account. In addition to the refund check, the monthly payments will be lowered if the escrow amounts decreased.
There are (very rare) instances where a refund check is issued to a homeowner in error. Even when the homeowner tried to return the money, the servicer wouldn’t accept it. It was months later when the servicer recognized the error and requested the money to be returned.
The lesson: ensure that the refund reason, and amount, both make sense.
Escrow Reserve Payments
Your escrow reserve is a cushion. It’s a sum of money that is there to cover unexpected payments out of the escrow account. In other words, if there’s money falling due before you make your monthly repayment, the reserve payment covers it.
Escrow Analysis and Mortgage Loan Advice | Mortgage Mark
The Mortgage Mark Team cares about educating our clients. We help them understand what to expect before, during, and after the mortgage loan process. Explaining escrow analysis is only one small part of that process. Please call us if you have any questions about your escrow account – even if we didn’t originate the mortgage.
We’re here to help. Contact us today or apply now for a home loan.
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