Mortgage Escrow Explanation

Some lenders establish escrow accounts to cover taxes and insurance.
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Your mortgage lender may open an escrow account for the purpose of paying real estate property taxes and will withdraw funds to pay the taxes when they are due. At closing, you will be required to make payments toward the escrow account to get it started. Your monthly mortgage payments will include additional amounts to allocate for real estate taxes and possibly homeowners insurance.

Accrued Tax Payments

If your mortgage lender establishes an escrow account in connection to the loan, the lender will determine the number of months of property tax payments that must always be present in the escrow account. Typically, lenders stipulate that the balance in the account at any given time must contain two months of payments toward the next tax bill. This process ensures that accurate funds are available for the lender to pay real estate taxes. These payments are part of the monthly mortgage payments.

Tax Assessments

Property taxes are calculated on an annual basis. Lenders determine the amount that must be deposited into the escrow account based on the prior year’s tax assessments. Each year, the lender will adjust that amount owed toward property taxes based upon the taxing authority’s assessment of your property. Your monthly mortgage payments will be calculated to add up to the total amount of real estate taxes annually.

Homeowners Insurance

Your homeowners insurance may also be escrowed. Similar to how your monthly real estate tax payments are calculated, the lender will ascertain the annual amount of your homeowners insurance and calculate your monthly payments by computing one-twelfth of the annual premium amount. Your homeowners insurance may also change annually depending on any adjustments or changes to your home, and the lender will calculate your escrow payments accordingly.

Escrow Account Shortage

If the escrow account has a shortage at the end of the year, the lender will increase the amount of your monthly installments to cover the deficiency. Alternatively, the lender may allow you to pay the amount of the shortage up front. If there is an overage in the escrow account at the end of the year, you may request a refund. Otherwise the lender will apply the excess amount toward future payments.

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