A mortgage escrow account is a way to pay your annual real estate tax, house insurance and similar bills with monthly payments. Your lender sets up an escrow account and adds 1/12 of the annual charges to each month's mortgage bill. You may start your account with several months' worth of escrow payments, which your lender keeps as a cushion. Sometimes, however, escrow accounts can build up balances, either positive or negative.
Changes Can Cause Negative Balances
If there's a miscalculation or if tax bills or insurance premiums go up, you can end a year with a negative escrow balance, meaning your monthly payments into the account didn't cover all the expenses out of it. In this case, your lender will send you a notice of an escrow deficiency. You usually have two options with a negative balance. You can pay the deficit in full, and your lender will adjust your monthly escrow going forward to prevent a shortfall next year. Or you can have the deficiency spread out over your next year's monthly bills, on top of the adjustment the lender will make going forward.
You Get a Yearly Analysis
Your lender is required to give you an annual escrow analysis, explaining how much you paid into the escrow account and how much the lender paid out of the account for taxes, insurance or any special assessments or other bills. This annual accounting will figure balances as a whole, rather than item-by-item. Thus a positive balance in the tax portion may offset a deficiency in the insurance part. You won't have a deficiency or an overage unless the overall escrow is out of balance.
You Can Get a Refund
Under the Real Estate Settlement Procedures Act, if your escrow balance is more than $50 above any cushion your lender requires, your lender must send you a refund. If it's less, the lender has the option of refunding it or applying it to reduce the next year's monthly charges. Some lenders routinely refund overages of $25 or more. You can return that refund and ask your lender to use it to reduce next year's monthly payments or apply it to the balance on your mortgage.
Do Your Own Calculation
You can do your own calculations of taxes, insurance premiums and other payments if you question the amount your lender is collecting. You'll have to know when each bill comes due and figure a rolling balance to adjust escrow amounts to meet each payment, which can be yearly, quarterly or semiannual. If you think you're being overbilled, you can make a formal request for a refund.
Loan Transfers Confuse Balances
Escrow balances can be confusing if another lender buys your mortgage. If the old lender has already paid a bill and the new lender starts collecting to pay it, you may wind up with an overage. The old lender should provide you with a statement showing the escrow status when the loan changed hands. You can compare that with the new lender's escrow statement and demand a refund if the statement indicates you were billed twice.
- Bank of America: Insurance, Escrow and Taxes
- Aurora Bank: Frequently Asked Questions
- HUD.gov: FAQs About Escrow Accounts for Consumers
- American Homeowners Association: Escrow Refund
- Cash Money Life: Mortgage Escrow Accounts Explained
- Lending Tree: Understanding Your Escrow Account
- Bankrate.com: Escrow Makes Payments -- Even on Rixed-Rate Mortgages -- Variable
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