Escrow accounts are set up with your mortgage to save funds to pay real estate taxes, house insurance and other annual bills as they come due. Escrow charges are added to your monthly mortgage payment in a relatively painless way to pay those big yearly bills. Escrow accounts are required on most loans insured by the Federal Housing Administration and many conventional home loans.
How Charges Are Figured
Monthly escrow charges are figured on one-twelfth of the annual tax, insurance or other bills, such as special assessments from other government agencies. They are based on the last annual bills and an estimate of what insurance premiums will be. Two months of escrow must usually be put up in advance to open the account to ensure a surplus when bills come due.
You Can Have Excess Escrow
If taxes, insurance premiums or other escrow charges change, you can build up an excess in the account. If a special tax ends, for instance, or you cut your insurance premium by increasing your deductible, the original escrow estimate may be high. Lenders also are allowed to keep that two-month cushion, however, so your account should always have a surplus.
Get an Annual Statement
Once a year, your lender must give you an escrow analysis statement, showing how much you paid into the escrow account, every bill that was paid from it and the ending balance of the account. If there is an excess over the two-month surplus cushion, you're entitled to a refund. Some mortgages and some lenders provide for less than a two-month cushion, which can affect your excess surplus.
You Get a Refund
You're entitled to a cash refund of any excess of $50 or more, usually paid within a month after you get your annual statement. Some lenders will refund excesses of $25 or more, but federal law sets a $50 limit. Any excess under the refund limit will be applied to your next year's escrow payments, reducing the monthly charges slightly.
Fees Could Change Despite Excess
Your monthly escrow fees could go up even if you have an excess at statement time. This can happen, for instance, if you and your lender are notified that real estate taxes will go up the next year or if your insurance company sends notice of a higher premium. The next year's escrow will be adjusted to those higher figures, even if you had an excess at the end of the year.