Learn what’s included in escrow payments and why the amount may change.

First-time and long-time homebuyers alike are often surprised by escrow payments that are included in their mortgage payment. Here’s a quick overview of mortgage escrow and why it can change.

What is a mortgage escrow account?

Escrow is simply money set aside with a mortgage lender or servicer to cover payments for property taxes and homeowners insurance. Some borrowers may also have private mortgage insurance (PMI) included in the escrow amount. The annual total of taxes and insurance is divided by 12, and the resulting amount is added to the monthly mortgage payment. When the bills are due, the lender or servicer pays them from the escrow account.

Why escrow changes from year to year

Many homeowners are surprised when their escrow amount fluctuates. Even holders of a fixed-rate mortgage can see their monthly payment increased due to escrow. Each year, the lender or mortgage servicer reviews the account. Any increase or decrease in property taxes or insurance premiums results in an adjustment.

Here’s how the numbers might play out. A property tax bill that goes up by $150 and an insurance premium that goes up $200 requires an additional $350 each year. $350 divided by 12 months means the homeowner’s escrow payment increases by $29.17.

Another reason escrow may change is that during an annual escrow review, the lender could discover an overpayment or shortage. If the taxes or insurance premiums were lower than expected, the amount overpaid is refunded to the homeowner. If there’s a shortage, the homeowner has to cover the difference.

Can you opt out of escrow payments?

Borrowers with 20% equity and an on-time payment history may be able to opt out of an escrow account. Certain loans, such as FHA loans, require an escrow account to remain in place until the loan is paid off.

If you do not want to pay into an escrow account and have adequate home equity, ask your lender for an escrow waiver. Also, be certain to budget for tax and insurance bills, and pay them on time.  All mortgage loans require that property taxes be paid and that the home be insured.

Once the surprise about escrow payments is replaced with knowledge of how these accounts work, many homeowners find escrow to be a good tool for ensuring property taxes and insurance premiums are paid when they’re due.

 

 All loans subject to approval. Rates, terms, and conditions are subject to change may vary based on credit worthiness, qualifications and collateral conditions.