You just received your annual mortgage escrow analysis and it shows your account came up short $400. Before you fire off an angry letter to your lender, understand how your escrow account works. It's basically a savings plan with your mortgage holder that is designed to set aside a bit of money every month to pay your annual real estate tax, insurance premium and, in some cases, other bills when they are due. The mortgage company receives the bills and makes the payments. If the bills are higher than in the past, your escrow may be short.
Your escrow account typically starts with a cushion that equals two months of escrow payments. If your monthly escrow is estimated at $200, for example, you'll put up $400 when you close the loan to start the escrow account. Your lender is authorized to keep that two-month cushion in your escrow account.
Monthly escrow fees are based on estimates of taxes and insurance, usually figured on the previous year's actual bills. You pay one-twelfth of each charge each month. Ideally, $100 a month in escrow for taxes will pay your bill if it's $1,200 or lower. If either taxes or insurance premiums are higher than estimated, you could have a shortage. You'll be assessed a shortage even if there's enough money to pay the bills but not enough for the cushion.
Pay It Off
You can pay an escrow shortage in full. Your lender must give you that option when it sends you the annual escrow analysis statement as required by law. The statement tells you how much is required to bring your escrow account into balance and what adjustments will be made to your monthly escrow payment for the next year to prevent another shortage.
Increase Monthly Payment
If you can't or choose not to pay off the escrow shortage, your lender adds that shortage to your next year's mortgage escrow payments along with an increase to prevent the shortage from reoccurring. The statement tells you how much your monthly escrow and total mortgage payment will increase. It also includes an explanation of why the shortage happened, for instance showing that real estate taxes projected to be $2,200 were actually $2,800.
You can't do much about tax increases except to understand whether they're permanent or a special assessment for one year only. You can adjust your insurance in many cases to reduce that premium. You can increase your deductible, for instance, to lower rates, but your lender requires you to keep insurance for the value of the house.
Opt Out of Escrow
In some cases, you can opt out of the monthly escrow account and pay the annual bills yourself. However, most government-insured mortgages, such as Federal Housing Administration loans, require you to keep an escrow account, and most conventional mortgages also require escrow unless you make a substantial down payment. When you opt out of monthly escrow, the insurance and tax bills come to you directly for payment, rather than going to your mortgage company. This does not reduce the amount of the bills.
- HUD: FAQs About Escrow Accounts for Consumers
- First Michigan Bank: Escrow Shortage Explanation
- Washington Post: Lender Blames Escrow Shortage for $400 Increase in Monthly Mortgage Payment
- SunTrust Mortgage: Escrow Accounts
- PNC Mortgage: Understanding Escrow
- MetLife Bank: An Escrow Account Protects Both You and MetLife
- Chase: How to Read Your Annual Escrow Account Disclosure Statement