When you buy a home, you must have funds available to pay the seller, cover closing costs and meet lender reserve requirements. The term “aggregate adjustment” refers to the final amount of money that you must place into an escrow account with your mortgage lender at closing. After that your lender will usually make a follow-up aggregate adjustment to your escrow account once a year.
If you use a Federal Housing Agency mortgage and put down less than 20 percent, you usually have to put money into an escrow account. Many conventional loans have the same requirement. Without an escrow account, you save and pay your real estate taxes and homeowner’s insurance once a year in one lump sum. With an escrow account, you pay the lender one-twelfth of your annual homeowner’s insurance and real estate tax bills every month as an add-on to your mortgage payment. Your lender then pays the tax and insurance bills in one lump sum.
When you get approved for a mortgage the lender must give you a good faith estimate that shows your initial escrow deposit. However, between the day you receive the estimate and the day you close, many things can change. Your homeowner’s insurance or real estate taxes may be more expensive than the lender thought or you may need to buy flood insurance. When you close, the HUD-1 statement will show the amount you have to turn over to your lender as escrow reserves. The difference between the initial and closing amounts reflect an aggregate adjustment.
How It Works
Your escrow account should not have any more than a two-month cushion for taxes and insurance at any given time. However, your lender cannot accept a negative balance since that defeats the purpose. So your lender forecasts out the payments it takes in from you and the payments it makes on your behalf over 12 months. If the balance drops below zero, the account needs more money at the beginning. If the account has too much money left over after making payments, it needs less. This whole process is called aggregate adjustment.
The lender determines your annual real estate tax bill is $3,000 and your homeowner’s insurance bill is $250. You will pay one-twelfth of this each month, $270.83, into an escrow account. Your good-faith estimate shows an initial balance of $541.67 for two months. You have six months of escrow payments before your tax bill comes due. If your lender keeps your original initial balance of $541.67, you will have a balance of $2,166.65 in your escrow account in six months, before your lender makes a payment for payment for you, and a negative balance of $833.36 thereafter. Therefore, your lender will adjust your initial escrow balance up by $833.36. Your HUD-1 will now show an aggregate adjusted escrow balance of $1,375.02, which is the two-month cushion plus the negative balance amount.
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