Normally, with fixed-rate mortgages, your monthly payment stays the same over the life of the loan. If your mortgage company also pays your property taxes, homeowners insurance and similar property-related expenses for you, it directs part of your monthly payment into a special fund: an escrow account. The amount you pay into escrow can fluctuate over time and change your monthly mortgage payment. The mortgage company can only use this money for the purpose intended. If your escrow account has a surplus at the end of the year, you have an escrow overpayment.
To calculate the anticipated payouts from your escrow account (for an existing home), your mortgage company often relies on records obtained at closing from the previous owner. For mortgages on newly built homes, the mortgage company makes an estimate of your projected expenses for insurance and taxes. Normally, the mortgage company uses public real estate records for similar homes in your neighborhood and quotes from insurance brokers in your area. After you occupy the house for one year, the mortgage company uses records based on actual payments to create escrow projections for your home.
By law, your mortgage company must give you a detailed annual statement that shows your total escrow account contributions and the amount disbursed from it for your taxes and insurance. Guidelines drafted by the U.S. Department of Housing and Urban Development in the 1994 Real Estate Settlement Procedures Act govern options for the resolution of any difference between the escrow amount collected and the total amount paid from escrow.
The guidelines of RESPA permit your mortgage company to collect no more than one-twelfth of the estimated amount needed to satisfy all of your insurance and tax obligations, as escrow payments each month. RESPA also allows the mortgage company to collect additional funds that total no more than one-sixth of the estimated annual projected escrow expense. This additional amount creates a cushion that the mortgage company uses if the escrow collected falls below actual expenses.
The federal guidelines give the mortgage company two options if you have an escrow surplus at the end of the year. If the surplus totals less than $50, the mortgage company can keep it and apply it to your starting balance for the next year's escrow account. If the surplus is $50 or more, the mortgage company must notify you in writing of the difference within 30 days and send you a refund for the difference. These rules apply only when your regular mortgage payment is current.
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