Mortgage lenders use escrow accounts as a way of making sure that you pay property taxes and other fees associated with ownership of your home. You contribute to the account each month as part of your mortgage payment and your lender dispenses payments when they’re due. An escrow account isn't something you'll have to think about very often, except when you have an outstanding escrow balance.
How an Outstanding Balance Happens
Your mortgage lender makes an estimate of your upcoming payments at the beginning of the year and then divides the total into 12 monthly payments. In an ideal world, as long as you make your mortgage payments on time, then your escrow account balance will be where it’s supposed to be. In reality, there are several things that can cause this plan to go awry. If you miss a mortgage payment and its associated escrow payment, your escrow account has a shortage. An increase in your property tax liability or the cost of your homeowner's insurance will also cause a shortage. On the other hand, a decrease in your tax or insurance means you’ll have an escrow account surplus.
What Happens with a Negative Escrow Balance?
The purpose of an escrow account is to make sure critical bills that pertain to home ownership are paid. If your escrow account doesn’t have a high enough balance to cover a payment, your lender will usually make the payment and then notify you of the negative balance. You may be asked to make a one-time payment to cover the shortage, or you may be allowed to spread the payment over a few months.
What Happens with a Positive Escrow Balance?
The Consumer Finance Protection Bureau regulates what happens with escrow account surpluses. Regulation X states that if your escrow account has a surplus of more than $50 at the end of the year, your lender has to return it to you within 30 days. If the surplus is less, your lender has the option of keeping it and applying it to your escrow balance for the next year. Homeowners who have fallen behind on their mortgage payments are the exception to the refund rule. Being more than a month late on your payments means your lender can keep your escrow surplus.
One of the most common reasons for a positive escrow balance is that the lender has factored a cushion into the escrow account to cover missed mortgage and escrow payments. By law, this cushion can be equal to up to two months of escrow payments and must be refunded if it shows up as a surplus at the end of the year.